2 defensive growth and income stocks trading at deep-value prices

These two companies are making plenty of money from waste.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Collecting and processing rubbish is not a glamorous or exciting task, but it is an essential process, which is why I believe that companies like Biffa (LSE: BIFF) and Renewi (LSE: RWI) could be great long-term investments.

Renewi was created in 2017 following the €510m merger of UK-based Shanks Group plc and European Van Gansewinkel Groep B.V. With over 8,000 staff operating in nine countries, Renewi is a European leader in the collection and processing of waste. And the company is at the forefront of the recycling industry. Even its name was conceived to showcase its “position at the centre of the circular economy” referring to its reuse of products.

Rising demand 

As the world becomes increasingly aware of the impact rubbish is having on the environment, and looks for new ways to reduce and reuse waste, demand for Renewi’s services should only grow. Unfortunately, in the near term, its potential will be obscured by the integration of Shanks and EVG, which is still taking place. 

City analysts are expecting the enlarged company’s overall earnings per share to fall by 14.2% for fiscal 2018 as integration costs offset growth. Management stated in a trading update published today that “the group’s overall performance for the year ended 31 March 2018 is anticipated to be in line with the board’s expectations.

Nevertheless, as the initial integration costs drop off, analysts believe Renewi’s earnings per share will jump 41% in 2019 to 6.9p as the extraction of synergies worth an estimated €40m per annum yields results.

Based on these projections, shares in the company are currently trading at a forward (2019) P/E of just 11.5 and support a dividend yield of 4%.

Debt concerns 

Shares in Biffa also look undervalued compared to the company’s growth potential. Specifically, at the time of writing the shares are trading at a forward P/E of 10.7 and support a dividend yield of 3.3%.

As my Foolish colleague Roland Head noted at the end of last year, one of the reasons why investors seem to be placing a low valuation on shares in Biffa is the firm’s high level of debt. Biffa reported net debt of £272.2m at the end of the first half. This represents a multiple of 1.9 times the group’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA). A ratio of two times EBITDA or more is usually a reason for concern.

Still, in my opinion, Biffa’s cash flow is robust enough to support this high level of borrowing. For the half year to the end of September 2017, the company generated £55m in cash from operations, forked out £19.4m for capital spending and paid off £19.9m in debt. For the period, free cash flow was £35.1m, or £70.2m annualised, compared to net debt of £305m. In my view, these figures show that the debt pile is under control, and does not represent a risk to its long-term viability in the immediate future.

So overall, if you’re looking for cheap growth stocks that support dividend yields of 4% or more, Biffa and Renewi look highly attractive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »