UK Edition
Questor: ignore this headline loss – Biffa is a good bet for attractively valued growth
A headline net loss does not look like an auspicious start to life as a public company (for the second time around) but in the case of waste management firm Biffa appearances are deceptive.
The deficit was the result of the costs associated with the company’s flotation last October and operating profit rose by a very robust 18pc on an underlying basis once those costs were excluded. Biffa also offered a maiden dividend of 2.4p a share.
Analysts expect the firm, a member of the FTSE Small Cap index, to generate double-digit earnings growth again in the new financial year, helped by both last year’s quintet of bolt-on acquisitions and solid organic progress in its operations.
That sort of growth suggests that the shares may be attractively valued on a forward price to earnings ratio of barely 11 and a prospective yield of 3.5pc. The balance sheet has some debt, including leasing commitments, but cash flow is good and forecast earnings cover the anticipated dividend payment by some 2.6 times, a nice margin of safety.
Barely half of British refuse collection and recycling is privatised and this could rise because government austerity may mean more outsourcing. However, the need to keep costs low means this is a complex industry so further consolidation is possible and Biffa may make further small purchases.
A number of minor bolt-on deals should be manageable, although anything too big would be a potential cause for concern, given how many big takeovers fail to deliver.
Investors must also keep a close eye on an agreement to work with a US-based firm, Covanta, on possible “energy from waste” projects. That is an industry littered with expensive failures, although Covanta does at least prefer to use a proven incineration technology.
A capital gain of some 8pc, with the maiden dividend on top, means we are off to a good start with Biffa and there could be more to come, especially if management keeps it simple.
Questor says: buy
Ticker: BIFF
Share price at close: 198.25p
Update: Aggreko
Our move to lock in a 25pc profit on Ashtead at around £16 looks far from daft after even a strong set of full-year numbers failed to boost shares in the FTSE 100 equipment rental firm that does much of its business in America.
The absence of any fresh upgrades to profit forecasts, weakness in the dollar against the pound and some loss of faith in the “Trump trade” are working against a stock that has deservedly done tremendously well. The absence of any share buy-backs since October also implies that managers think the shares are no longer cheap.
This all contrasts markedly with Aggreko, whose shares are admittedly still some 12pc down from when we first looked at them in January. Aggreko trades on around 15 times 2017 earnings, which are expected to come in 40pc below those of 2012, whereas Ashtead trades on nearly 14 times earnings that are forecast to be four times higher than those of five years ago.
In contrast to Ashtead, expectations are low at Aggreko and the valuation looks to price in a lot of the risks rather than the potential upside, even if the themes involved are very similar.
Questor says: buy
Ticker: AGK
Share price at close: 927.5p
Update: Tesco 5.5pc 2033 bonds
Shares in Tesco fell slightly after a good first-quarter trading statement last week but the Tesco bonds listed on the London Stock Exchange’s Order Book for Retail Bonds (Orb) held firm.
The bonds have risen in price since we last looked at them in February but the yield to maturity is still around 4.5pc.
The failure of the shares to progress partly reflects the time and effort that will be needed to make the planned £3.7bn merger with Booker, the food wholesaler, actually work, assuming it gets clearance from the competition authorities.
The cash-and-stock nature of the deal protects Tesco’s balance sheet (and therefore bondholders) a little, while the group’s net debts continue to fall, offering further reassurance to investors in its tradable bonds.
Questor says: hold
Ticker: 31CM
Price at close: 112.5p
Russ Mould is investment director at AJ Bell, the stockbroker
Questor archive: telegraph.co.uk/questor