Shares in waste management company Biffa (BIFF) tumble 12% to 217.5p on Wednesday after spooking the market over recycling rule changes in China.
China’s president Xi Jinping’s drive to create a ‘beautiful China’ has led him to enforce strict quality restrictions on imports. This includes types of cardboard, mixed paper, plus an outright ban on plastics.
CHINESE PAPER BAN
It is the clampdown on mixed paper that has got Biffa investors in a spin. Recycling mixed paper has been a cash cow for Biffa in the past, where it had been paid as much as £70 a tonne. It is now receiving next to nothing for the waste product.
It is the current company view that strong trading from its separate landfill operations is largely mitigating the paper waste headwinds, but it leaves the question hanging, for how long?
CAUTIOUS ANALYSTS
James Beard, analyst at stockbroker Numis, is taking a cautious view. While he's happy to leave this year to 31 March 2018 forecasts unchanged, implying earnings before interest tax and amortisation (EBITA) of £81.2m, he is now anticipating virtually no growth next year.
March 2019 EBITA, according to Numis, is set at £81.9m. This will flow through to an effective earnings downgrade of 8% in 2019, with 19.2p expected.
Biffa is responding to its struggles by bulking up its industrial and commercial divisions, with two bolt-on acquisitions which are forecast to add around £6m of additional revenue in future.
ARE THE SHARES TOO CHEAP?
Biffa now trades on 11.3-times 2019’s 19.2p of earnings using Numis’ forecasts. The 2019 income yield stands at 3.1%.
The Numis analyst has cut his share price target from 315p to 285p. But it is difficult to see what might change near-term investor sentiment to inspire 30%-odd upside.
