I have had a positive view on the waste management company Biffa (BIFF) for a while now, mentioning last October here that ‘on a similar multiple for its likely earnings for the 2021 or 2022 full years and this is how you get a three quid odd share price target’. Back then the stock was about 220p, but today it is almost at my three quid target...and it is nothing to do with its next set of numbers due soon as the company has announced it would be buying the collections business and ‘certain recycling assets’ from its industry peer Viridor.
I think the Biffa management has done fundamentally another smart deal. Clearly any waste business can be impacted a bit by lockdowns - as I am sure we will see in the full year numbers - but fortunately, looking historically or prospectively, this is not a ludicrously valued business. The acquisition will cost Biffa about £126 million, equivalent to around a x10 underlying multiple and offering a £10 million cost saving over time. None of these are bad multiples at all, especially as most of the assets are in the south of England, sitting well with the northern/midlands historic greater focus of Biffa.
The other angle is that it will help build its recycling business further. I know that waste collection business can seem like being a bit different, but the 2020s are changing. Biffa itself notes its skills in ‘dry mixed recycling including plastic bottles, pots, tubs and trays and film’. This will help it scale up here too. Additionally, it notes the acquisition's ‘long-term cost-effective low carbon outlets for non-recyclable waste across the UK’ as well.
Net debt is estimated to rise to over £450 million or a net debt:ebitda rating of c2.6-2.7x. The full year numbers will discuss the free cash flow progress and I imagine again it will be back in the +3-5% range. There is a reason after all why the deal announced that the net cash debt position would fall to ‘c2x ebitda over 12-18 months’. It is really good to see the Biffa shares now near to the target I mentioned last October, aided by the smart looking deal. There will be further business and balance sheet updates with the full year numbers, but the smartest thing to do for the interim period is to keep holding on.
Filed under: Biffa, Amigo, Sosandar, Dispersion, Epwin, Smiths Group
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