Beaufort Securities Breakfast Alert: Biffa, Greene King, Zoopla Property


Today's edition features:
• Biffa (LON:BIFF)
Greene King (LON:GNK)
Zoopla Property (LON:ZPLA)

"Global oil prices continued to rise during Asian trade early Thursday morning. Having gained 9% on the New York Mercantile Exchange during the US session, light, sweet crude for January delivery was priced at US$49.50/bbl, while Brent traded in London's futures exchange at US$51.90 for the following month. Having come to an agreement to cut production for the first time since the financial crisis to 32.5m barrels a day, in which Saudi takes a big hit and Russia participates for the first time since 2001, enforcement remains the key issue. OPEC has no authority to force compliance of its members which, given their past records of cheating, raises concern; it will, however, hold talks with non-member producers on 9th December in order to discuss the issue of policing amongst other issues. Meanwhile, this spike in crude prices will likely already be prompting US shale operators to take advantage by pulling spigots out of their presently dormant capacity, suggesting the overnight gains will be tricky to sustain. US equities ended mixed on the news, with the Dow closing the highly eventful month with a fractional gain driven by its oil majors, while the S&P-500 and NASDAQ fell deeper into the red, as the US$ hit a 9-month high against the Yen and some traders fretted over the loss of international competitivity now being faced. Asian equities, by comparison, were strong across the board, with the Nikkei riding high on the OPEC news and weakening currency, before giving back half of its gains by market close. Chinese equities were also firm, helped additionally by the release of official manufacturing PMI data showing November rising to 51.7, up from 51.2 in the previous month and beating consensus expectation. Amongst all this the loser, of course, has been the US government bond, which capped its worst month in seven years, taking a further post-election hit yesterday as investors continue to speculate on the ending of the long-run bull market in Treasuries. European traders meanwhile are keeping a nervous eye on the Euro as polls for Sunday's constitutional referendum in Italy continue to predict a narrow victory for the 'No' vote while, in the UK they will be awaiting today's Manufacturing PMI release and the Nationwide House Price Index figures. UK corporates due to provide earnings or trading updates include APC Technology (LON:APC), Clipper Logistics (LON:CLG), Daily Mail & General (LON:DMGT), Market Tech Holdings (LON:MKT) and PHSC (LON:PHSC). Index funds will also be balancing their holdings in Travis Perkins (LON:TPK) and Polymetal (LON:POLY) which were squeezed out of the FTSE-100 in yesterday's index reshuffle. London equities are seen opening slightly weaker, with the FTSE-100 seen down around 10 points in early trade."
- Barry Gibb, Research Analyst


The FTSE-100 finished yesterday's session 0.17% higher at 6,783.79, whilst the FTSE AIM All-Share index closed 0.09% better-off at 819.00. In continental Europe, the CAC-40 finished 0.59% higher at 4,578.34 whilst the DAX was 0.19% up at 10,640.30.
Wall Street
In New York overnight, the Dow Jones rose 0.01% to 19,123.58, the S&P-500 shed 0.27% to 2,198.81 and the Nasdaq lost 1.05% to stand at 5,323.68.
In Asian markets this morning, the Nikkei 225 rose 1.03% to 18,497.00, while the Hang Seng moved 0.55% higher to 22,915.56.
In early trade today, WTI crude was up 1.36% $50.11/bbl and Brent was up 8.82% to $50.47/bbl.


Bank governor Mark Carney warns on household debt
The governor of the Bank of England, Mark Carney, has given a warning about the high level of debt in UK households. In particular he said that consumers were borrowing more on their credit cards and other unsecured debt. Figures from the Bank this week showed that credit card lending is at a record level, up by £571m in the last month. Overall unsecured debt - which includes overdrafts - is rising at its fastest pace for 11 years. "We are going to remain vigilant around the issue, because we have seen this shift," he told a press conference at the Bank. The Bank's Stability Report showed that the overall ratio of household debt to income was 133% in the second quarter of 2016. The Bank said that was high by historical standards, although it was not as high as in the financial crisis. "It's the early phase of re-leveraging, following a long period of improvement of the position," said Mr Carney.

Company news
Biffa (LON:BIFF, 177.00p) – Buy
Biffa, a leading UK integrated waste management company, yesterday announced its maiden results for the 26 weeks ended 23 September 2016, following its admission to trading on the London Stock Exchange on 20 October 2016. Highlights included net revenue up 8.6% to £446.7m (3.7% organic and 4.9% acquired) driven by growth in the Industrial & Commercial, Municipal and Resource Recovery & Treatment divisions. Underlying EBITDA was up 14.9% to £71.0m while Operating Profits increased by 22.9% to £39.7m as margin rose to 8.0% from 7.0%. Two acquisitions were completed in the period, and a third post period-end, with combined targeted annual revenue of some £42m. Period-end pro forma net debt amounted to £270m or 2.1x Underlying EBITDA, based on post-IPO capital structure. The Board confirmed adoption of a progressive dividend policy, which will balance shareholder returns with management's commitment to investing for long term growth. The Group intends to pay annual dividends based on a targeted dividend pay-out ratio of approximately 35% of consolidated annual underlying post-tax profit. The first dividend payment is expected to be a final dividend in respect of the period between the date of admission to trading on the London Stock Exchange and the end of financial year 2017, which is expected to be paid following approval of the year end accounts at the annual general meeting of the Group, to be held in July 2017. Following this, the Group intends to pay interim dividends in December in the relevant financial year and final dividends in July of the following financial year, with the amount being paid in an approximate one-third (interim) and two-thirds (final) split.

Our view: A strong first half performance which, coming hard on the heels of achieving its market quotation, should be no surprise. Current full year expectations are unchanged but, as a highly regarded and traditional, branded pure play in the expanding and regulated UK business of integrated waste management, Biffa remains undervalued. Shanks is probably the nearest comparison in this particularly fragmented sector, of which the nation's top five players only claim about one-third of the Total UK market share. But change is coming as the sector races toward concentration! Barriers to entrance are already high and getting higher. Customers are sticky and increasingly require specialist services. All this leaves the 2000+ small, local 'mom and pop' operators that has historically serviced the nation's commercial and municipal needs looking to exit. Demerged from Severn Trent back in 2006 and having injected new management, Biffa underwent something of a cultural change, heightening efficiencies through risk sharing and price increases. The Group now is a powerful cash generator with excellent earnings visibility, which will permit it to distribute 35% of net profits in the form of future dividends without hindering expansion. Following Admission, the Group has used its primary proceeds to roughly half debt down to around 2x EBITDA. This is important, as the balance sheet then provides headroom for the management to embark on something of a 'feeding frenzy' of acquisitions. Given that the incremental cost of servicing such bought-in contracts across its regional network is minimal, meaning these additional revenues fall largely to the bottom line. This will provide Biffa management with the future opportunity to quite significantly surpass earnings expectations while securing a larger share of the UK opportunity in what otherwise might be considered a somewhat staid industrial segment. Based on 14.0p of earning in FY2016/17, followed by 17.5p the following year, forward P/E multiples of 12.7x and 10.2x, implying a sub-5x 2018E EV/EBITDA. That's cheap, particularly considering the FY2017 yield will be around 3.5%. Beaufort recommends Biffa as a Buy and sets a target price of 225p/share.

Greene King (LON:GNK, 686.00p) – Buy
Greene King, a UK operator of pubs, restaurants and hotels, yesterday announced an interim results for the 24 weeks ended 16 October 2016 ('H1 FY2017'). During the period, revenue advanced by +13.8% to £1,044.3m, comprised of +15.6% increase in Pub Company, +14% rise in Pub Partners and -0.6% fall in Brewing & Brands, against the comparable period (H1 FY2016). On an adjusted basis, pre-tax profit grew by +14.6% to £139m and earnings per share climbed by +4.3% to 36p. When stripping exceptional items, largely the impairment of property, plant and equipment, statutory pre-tax profit increased +9% to £92.5m, leading basic earnings per share of 23.9p, down -4%. Free cashflow jumped by +218.8% to £42.4m while net debt widened to £2.2bn (H1 FY2016: £2.1bn). Return on capital employed remained flat at 9.4%. On the operational front, the Group said integration of Spirit is going ahead of schedule. The Group completed 50 brand conversions for Pub Company and its IT system is now rollout in over 700 pubs which the Group expect complete by July 2017. The Group declared an interim dividend of 8.8p, up +4.1%, to be paid on 20 January 2017.

Our view: Greene King performed in line with consensus with adjusted pre-tax profit slightly beating the estimates. The Group delivered growth in all divisions, outperforming the market despite continuing challenging market conditions. Pub Company recorded like-for-like ('LFL') sales growth of +1.3%, ahead of the market which grew by +0.8%. Pub Partners showed strong LFL sales growth of +4.2% supported by continued capital investment and the growing number of turnover agreements in its estate, while the volume fell slightly although it performed better than the underlying UK beer market itself. Greene King's Brewing & Brands recorded a slight fall in revenue as the Group reduced its exposure to low margin accounts in the on and off-trade channels, resulting volume contraction. Looking ahead, the Group said it expects £30m synergies savings this year, achieving one year ahead of schedule, followed by £35m targeted by the end of FY2018. Macroeconomic events have, of course, resulted in increasing levels of consumer uncertainty, while National Living Wage pressure along with change in consumer dining habits means the environment remains challenging. The management said, however, that they are "confident" and "well placed" to deliver another year of progress, value creation and shareholders returns. The shares are valued at FY2017 P/E of 9.9x along with dividend yield of 4.8%. Given Greene King's ability to outperform the market and confirm improved post-period trading, Beaufort reiterates its Buy rating on the shares.

Zoopla Property (LON:ZPLA, 334.90p) – Buy
Zoopla Property Group ('Zoopla'), operator of home-related digital platforms such as property website Zoopla, yesterday announced its full year results for the 12 months ended 30 September 2016 ('FY2016'). During the period, revenue soared +84% to £197.7m, comprised of +9% increase in Property Services revenue to £86.7m and +301% increase in Comparison Services revenue to £111m), against the comparable period (FY2015). Adjusted EBITDA surged +89% to £77.1m and pre-tax profit consequently rose +38% to £46.2m, leading to basic earnings per share of 8.9p, up +44%. Cash and cash equivalents stood at £3.4m (end-FY2015: £19.2m) while net debt at the period-end increased to £146.3m (end-FY2015: debt £93.2m). On the operational front, the Group acquired Property Software Group, a UK leading provider of software and workflow solutions to property professionals, used in over 8,000 offices, for £75m in April 2016. Total number of unique Property partners including Property Software Group increased by +6% on a like-for-like basis to 23,101. Zoopla's Founder & CEO, Alex Chesterman, commented "The Group has had another very successful year and we are stronger and more diversified than ever. We continue to lead innovation in the property and comparison markets as we work towards fulfilling our mission of providing the most useful resources for consumers when finding, moving and managing their home and being the most effective partner for related businesses". The Group proposed a final dividend of 3.7p per share, up +48%, to be paid on 9 February 2017, taking full year dividend to 5.2p per share (FY2015: 3.5p). Then next trading update from the Group will be published on 2 February 2017.

Our view: Zoopla performed strongly in FY2016, achieving record revenues and adjusted EBITDA. Revenue was boosted by the Comparison Services division (FY2016: 56% of revenue), which increased by +301%, outperforming expectations as a rapidly increasing number of customers adopted the comparison website along with record levels of home services switching across every vertical (gas, electricity, broadband, TV, phone and personal finance products), from which the Group said it helped consumers to save £320m in their energy billings alone during the period. Though margins fell to 39% (FY2015: 45%) due to the mix effect incorporating a full year's trading from the Comparison Services division and 5 months of trading from Property Software Group, growth in profitability has contributed to +48.8% increase in full year dividend payment, in line with its 35-45% target payout ratio. Acquisition of Property Software Group has enabled the Group to become "UK's only end-to-end solution for property professionals", with offering including software, workflow, CRM and marketing tools. Zoopla recorded strong traffic of over 600 million visits to its websites and apps, with 68% coming via mobile. Post period, the Group yesterday announced the acquisition of Technicweb, one of the UK's leading estate agency website design and hosting businesses, along with investment in strategic partnership with Neos, the UK's first connected home insurance provider. The Group said it has had a "good start" across both divisions, where Property Services division the management saw continued trend in UK Agency partner growth, with over 600 branches having now returned over the past 18 months, while the Comparison Services division also performing well. Looking ahead, the Group will continue to invest across the business and develop further products and the Board said they are confident to meet market expectation for the FY2017. We believe Zoopla is comfortably placed to continue its growth momentum in the FY2017 and therefore, retain a Buy rating on the shares.

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