We’re perplexed as to why waste management group Biffa (BIFF) trades on such a low valuation given the relatively defensive nature of its business and expectations for sustained profit growth.

Many investors at the moment seem happy to pay price to earnings multiples in excess of 20 for any company that is showing decent growth. It therefore seems bizarre that a company like Biffa is left behind, trading on a mere 13.5 times earnings.

Biffa operates in a structural growth market. An expanding population living longer and in a greater number of houses (and working in a greater number of offices or other business premises) all equates to a greater volume of waste being created.

Exacerbating that situation is increased legislation on the waste industry, such as pressure to reduce items being sent to landfill and ensure more items are recycled.

Biffa is well placed to capitalise on this situation as it collects, processes and recycles waste and it also produces energy, all from the UK.

Stockbroker Numis forecasts pre-tax profit rising by 30% in the current financial year to £58.7m, before reaching £64.9m the year after.

The biggest contributor to Biffa’s group profit is its Industrial & Commercial (I&C) division which provides services to 72,000 customers including retailers John Lewis and Next (NXT). It continues to buy small rival I&C businesses to boost its scale and capacity.

The division enjoyed a 7.4% underlying operating margin in 2017, up from 5.7% in 2016. Margins are improving thanks in part to maximising route density. This involves winning extra work so its trucks are picking up from a greater number of addresses per street which means extra income without lots of extra cost.

Next year should see Biffa decide whether it will build energy-from-waste plants in the UK, in partnership with US specialist Covanta. It believes the UK needs to expand its current infrastructure to convert more rubbish into fuel or energy.

Biffa insists it would only use proven technology should it decide the economics stack up on the projects. It says it won’t delve into the more radical energy-from-waste techniques which have dogged various third party schemes in the UK over the past few years.

The last reported net debt position was £272.2m and its net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio was a comfortable 1.9 times. (DC)

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