After today's results, is Shanks Group plc the better buy over Biffa plc?
It's something of an unwritten investment rule that boring companies tend to be the best long-term investments, and there's nothing more boring than rubbish.
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Indeed, if a company specialising in waste and waste disposal was to compete for investment against the hottest new app, online fad or high-risk/high-reward startup, it wouldn't stand a chance (although a waste disposal app might). However, disposing of rubbish is a huge market, that's growing every year and this will continue no matter what the economic situation.
Rubbish trends (sorry) imply that waste disposal groups Biffa(LSE: BIFF) and Shanks(LSE: SKS) could be some of the best long-term defensive companies trading on the London market today.
Waste giant
Shanks is currently in the process of merging with Belgian peer Van Gansewinkel Groep BV to create a leading waste-to-product business in the Benelux countries. The two managements believe that by combining, the groups will be able to cut EUR40m of costs, improving margins and leaving more profit to channel into expansion. Shanks is paying EUR482m for Van Gansewinkel.
Shanks' acquisition of its Belgian peer is part of the group's plan to complement organic growth through acquisitions. As I said above, waste is a defensive business but growth is slow, so both Shanks and Biffa are looking for bolt-ons to boost growth.
Still, organic growth is hardly sluggish at these two waste groups. Shanks reported today that revenue for the six months ended 30 September 2016 rose 7% in constant currencies to £348.4m while underlying profit before tax grew 23% on the same basis, or 44% at reported rates. Underlying earnings per share expanded by 23%.
Shares in Shanks currently trade at a forward P/E of 22.8, which is fairly expensive. That said, analysts have pencilled-in earnings per share growth of 40% for the group's fiscal year ending 31 March 2018 after the Van Gansewinkel acquisition completes. Overlaying this earnings growth on the company's valuation gives a PEG ratio of 0.4 for 2017. A PEG ratio of less than one indicates that the share in question offers growth at a reasonable price.
Unloved Biffa
As Biffa is new to the London market, City estimates for growth are thin on the ground. But management figures indicate that the company could be undervalued at current levels.
Biffa is the second-largest waste management company in the UK, employing 7,000 people and disposing of 6.6m tonnes of waste every year from more than 95% of UK postcodes and 2.4m households.
Last year, before the company became a public entity, Biffa reported underlying earnings of £122m on revenues of £927.5m. The company's current market capitalisation is less than £450m. Based on last year's numbers then, Biffa is trading at 3.7 times 2015 underlying earnings and 0.5 times revenue.
Biffa also appears cheap compared to international peers. As the Financial Times points out today, Biffa's enterprise value is a modest 5.6 times trailing earnings compared with French rival Veolia's 7.7 times trailing earnings.
Nonetheless, for the time being, these estimates are just that, estimates. Until Biffa reports its first set of results as a public company and investors have more clarity, Shanks may be the better investment.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
