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Biffa creating value from waste

The waste management group is investing in plastics recycling and energy from waste opportunities
Biffa creating value from waste

Originally part of Severn Trent (SVT), Biffa (BIFF) was demerged onto the FTSE 250 in 2006 before being taken private in 2008 as part of a £1.7bn leveraged buyout. Falling into the hands of its lenders in 2013, the waste management provider rejoined the main market in 2016 after trimming its planned listing price by as much as a third to 180p. Potential investors shouldn’t be deterred by that rocky path. Momentum is building as the group invests in long-term growth opportunities – higher-margin industrial and commercial waste (I&C) market, plastics recycling and energy from waste (EfW). Biffa is targeting 50 per cent growth in underlying operating profit and over 50 per cent EPS growth between 2020 and 2023.

IC TIP: Buy at 297p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Defensive markets

Consolidation opportunities

Supportive policy environment

Energy from waste potential

Bear points

Lower collections margins

Low interest cover

The six months to 27 September saw underlying operating profit rise 12 per cent year on year to £45.7m, with the collections business generating over three-quarters of the total. Municipal collections have proved challenging amid a competitive market and underperformance on certain contracts, although these activities only account for a fifth of the collections division. Municipal profit margins dropped to 2.9 per cent in 2019 from 6.4 per cent. Biffa foresees the operation stabilising at a lower level of profitability. But collections growth is expected to come from the larger I&C division – 70 per cent of first-half collections revenue – where the margin improved by 0.7 percentage points to 9.1 per cent in 2019.

Biffa is the market leader in I&C collection with an 11 per cent share. Of its national competitors, only Veolia’s (Sp:VIE) market share exceeds 5 per cent. Larger operators benefit from economies of scale and Biffa has grown by consolidating smaller, regional operators. It has spent £157m on 40 acquisitions since 2014, representing annualised revenues of £232m.

In the first half its resources and energy division achieved a 12.3 per cent margin. Biffa is focusing on plastics recycling, which should benefit from new regulation and reduced use of landfill. Recovering somewhat from China’s import ban on certain recyclable material, recycling revenue jumped over a fifth to £46m in the first half. Biffa has been expanding its domestic capacity, countering the decline of ‘collect, sort and export’. The group is aiming to boost plastics processing capability to around 200 kilotonnes per annum (ktpa) by 2025. Its new £27.5m polyethylene terephthalate (PET) bottle recycling facility opened in January has brought capacity to 120ktpa. It is expected to generate £40m in annual revenue.

The landfill tax has improved the economics of EfW, which should also be underpinned by a projected annual shortfall of six megatonnes (mt) in EfW capacity to 2030. Biffa is investing £70m-£80m in two joint ventures with US specialist Covanta (US:CVA) to process 750ktpa of waste from 2023, with the projects yielding an internal rate of return in the mid-to-high teens. Covanta will operate and maintain the facilities while Biffa provides the feedstock, harnessing its collections footprint that covers 95 per cent of postcodes.

Excluding £140m in lease liabilities, net debt ticked up 2 per cent year on year to £310m. Equivalent to two times adjusted cash profits, this is within the group’s target 2-2.5 times range. That said, expensive lease financing make for a high underlying interest charge of £16m. 

BIFFA (BIFF)   
ORD PRICE:297pMARKET VALUE:£741m 
TOUCH:296-297p12-MONTH HIGH:300pLOW: 173p
FORWARD DIVIDEND YIELD:2.8%FORWARD PE RATIO:12 
NET ASSET VALUE:148p*NET DEBT:129%** 
Year to 29 MarTurnover (£bn)Pre-tax profit (£m)***Earnings per share (p)***Dividend per share (p)
20170.9945.029.42.40
20181.0860.019.26.70
20191.0964.020.67.20
2020**1.1669.022.47.80
2021**1.1974.024.08.40
% change+2+7+7+8
Normal market size:10,000   
Beta:0.61   
*Includes intangible assets of £338m, or 135p a share
**Includes lease liabilities of £140m
***JPMorgan Cazenove forecasts, adjusted PTP and EPS figures