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2 defensive demons to consider buying before June’s updates

Companies specialising in providing fairly dull services can often make for superb investments. So, with results from waste management outfit, Biffa (LSE: BIFF) and storage expert Safestore (LSE: SAFE) due next month, would now be an ideal time to take a position in either stock (or perhaps both)?

Not so rubbish?

Biffa’s time in the market so far has been fairly uneventful. Since arriving on the London Stock Exchange last October, shares in the Wycombe-based business have climbed about 10% — slightly higher than the rise seen in the FTSE 100 index over the same period.

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The company’s most recent trading update — released in March — read fairly positively. According to management, underlying trading was consistent with predictions made back in November’s half-year results. Thanks to particularly good performance in its Industrial and Commercial division, group underlying EBITDA and operating profit were in line with expectations.

Trading on just times 11 times earnings for the 2017/18 financial year (assuming earning per share growth of 17% can be achieved), I think Biffa represents good value at the current time. It won’t shoot the lights out in terms of performance but stocks like this never will. Levels of free cashflow are more than acceptable and the company’s decision to diversify away from simple rubbish collection into areas such as renewable energy production appears prudent. A forecast 3.4% dividend yield, safely covered by profits, isn’t to be sniffed at either. 

For me, the biggest issue with Biffa remains the sizeable amount of debt on its books. Standing at £518m last November, that’s more than the market cap of the entire company (£493m). If demand for the kind of services offered by Biffa wasn’t so predictable, I’d be worried. Nevertheless, I imagine that the market will want to see evidence that this not-insignificant burden is being addressed sooner rather than later.

Full-year results are due on 14 June.

Steep valuation?

In contrast to Biffa’s relatively quiet time on the market, shares in Safestore have been flying of late. Since reaching a low of 327p back in December, the stock has climbed 32% off the back of encouraging news from the company. 

In its February Q1 update, Safestore reported a 13.3% rise in group revenue at constant exchange rates with like-for-like revenue climbing 4.7%. Broken down, revenue from the UK rose just under 16% (4.95% on like-for-like basis), supported by a number of new store openings and last year’s acquisition of Space Maker. Revenue from its operations in Paris rose by 4.6%.

After such a run of form, the question now is whether a valuation of 20 times expected 2017 earnings is too rich. It’s certainly on the pricey side considering the rather mundane nature of its business and the level of competition the firm faces from listed and unlisted peers (the former including Big Yellow). Like Biffa, there’s also a fair amount of net debt on Safestore’s books — £370m at the end of the last financial year.

So, while levels of free cashflow have been steadily improving at the £936m cap over the last few years and a predicted 35% hike to this year’s total dividend would surely be welcomed by investors, I’d be tempted to sit on the sidelines for now. One to buy on a dip perhaps.

Safestore reveals its latest set of interim numbers on 15 June.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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