Tuesday, September 13, 2016

Biffa Gets Recycled

Investors will have a second chance for a stake in Britain’s solid waste management operation Biffa Group.  The company is staging an initial public offering of GBP270 million (US$356 million).  Certain shares are being offered by current shareholders.  The stock will be listed on the London Stock Exchange as BIFF.  The IPO represents the 100-year old company’s second time around with a publicly traded stock.  After only two years as a public company Biffa was taken private in 2008 through a leveraged buyout only to be seized by creditors in 2012 at the peak of the financial crisis.
The Biffa IPO gives investors a bite at the second largest solid waste management and recycling operation in the U.K.  Veolia Environmental Services is the top waste collector in the U.K. with about GBH$1.5 billion in annual revenue. Biffa runs a distance second, followed closely by the Pennon Group’s Viridor and Suez Environment.  With a new management team at the helm  -  most appear to have come on board as part of the  turnaround team -  current shareholders must be looking to cash out of the rescue effort.

Biffa runs a fleet of 2,600 collection vehicles and claims its collection territories cover of 95% of the country for both residential and commercial customers.  Over 2.1 million tons of waste are process per year and carried to 80 collection depots and transfer stations around the region.  The company operates two recycling facilities as well as methane gas collection at 34 landfill sites.  Anaerobic digestion facilities have the capacity to process 300,000 tons of food waste per year and Biffa claims 530 million kilowatt hours of energy generated per year from its waste-to-energy plants.
The company reported 3.9% top-line growth in the last three years, reaching GBP830.0 million (US$1.1 billion) in net revenue in the fiscal year ending March 2016.  EBITDA was GBP$122.2 million (US$161.3 million), representing an cash earnings profit margin of 13.2%.  In the first quarter 2017 ending June 2016, the company reported 7.4% top-line growth and an expansion in the margin to 14.2%. 
It appears fundamentals are headed in the right direction for Biffa.  Management intends to use the proceeds of the offering to optimize leverage by paying down debt. The target net debt will be 2.0 times EBITDA.  There is also a tax bill payable to U.K. authorities for landfill taxes.  The balance of the offering proceeds is to be set aside for acquisitions.  The waste management industry in the U.K. remains highly fragmented and there appears to be some opportunity for growth by picking up smaller operations around the country.  Indeed, the Biffa team has some experience with acquisitions. 
After a period during which the company lost market share, the group resumed a more aggressive posture.  Shanks Waste Management and PHS All Clear Ltd were acquired in 2014.  Then in late 2015, Biffa entered the hazardous waste business with the acquisitions of PHS Chemical Waste Ltd and Enviroco Ltd. hazards waste operation.  In June 2016, Biffa acquired Cory Group, an industrial and commercial waste operation.  The Cory deal will add approximately GBH275 million to Biffa’s top line, potentially putting it over the GBH1.0 billion mark in annual sales and creating a more vigorous competitor for Veolia.
Interestingly, Biffa plans to pay a dividend to public shareholders at a 35% payout rate.  Dividend payments are expected in December and July of each year.
Biffa offers an interesting opportunity for investors interested in environmental plays.  The company has the profile U.S. investors know from the U.S.-based Waste Management (WM:  NYSE) and Waste Connections (WCN:  NYSE), both of which are significantly larger operations than found in the fragmented U.K. market.  Depending upon the IPO price BIFF could offer investors a compelling play on the inevitable consolidation in the U.S. waste collections and waste-to-energy industry.  A more detailed prospectus is expected in the coming weeks.  It will be an interesting read about a company that went from private to public to private, bankrupt and rescued, and then public again in the last ten years of its storied 100-year history.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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