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Hobson: Don't Invest in What You Don't Understand

THE WEEK: Morningstar columnist Rodney Hobson laments confusing management speak - and concludes not to invest in companies whose statement's he does not understand

Rodney Hobson 2 December, 2016 | 2:00PM

Waste disposal is a rather unloved sector – it is easy to understand why. It may not make polite dinner conversation, but that does not rule it out for investment purposes. One of the sector’s more well-known protagonists, Biffa (BIFF), has suddenly turned bearish. This seems a little unfair.

The problem is that it is very difficult to get a handle on quite how well or badly Biffa is doing. It reported revenue up 8.6% in the 26 weeks to September 23 but 4.9% came from acquisitions. Still, 3.7% organic growth isn’t bad. Margins improved as well.

More difficult to interpret are the profit figures. Forget about EBITDA – earnings before interest, tax, depreciation and amortization – which regular readers know is a meaningless figure, especially where a company has been on an acquisitions spree. When this is the first profit figure highlighted, as in the case of the Biffa announcement, you should be especially suspicious.

Then we get underlying operating profit; much higher, and statutory operating profit; down heavily, and a pile of footnotes about depreciation and amortisation and acquisition intangibles and material impacts from changes in real discount rates … you get the picture. Well, actually no, you probably don’t get the picture because your eyes have glazed over.

You have to go a long way down the statement to find the first mention of pre-tax profit, which is the figure I look for first, and even then there is the confusion of underlying profit of £23.9 million but a statutory loss of £3.6 million. Comparisons with last year come way down the statement.

I don’t like investing in floats because of the hazards there usually are in interpreting the figures, especially comparisons with the previous year. Biffa was floated on 17 October at 180p a share. It ran up to 185p on the first day of conditional trading but has been below the float price since. The shares were hardly changed on the announcement but slipped 2% the following day.

Chief executive Ian Wakelin reckons this was a strong first half performance and he looks forward to reporting on further progress. Despite two paragraphs of management speak in between these two pronouncements, I think he is probably right. Those who were confident enough to buy in the float have no reason to sell at this stage.

However, I don’t invest in companies I do not understand, and I really don’t understand a lot of the Biffa figures. I’ll look again when the picture is clearer – too bad if that proves to be too late.

Dividends Up at Glencore

I feel no envy, only admiration, for the brave souls who bought into mining and commodity trading group Glencore (GLEN) when its shares hit the bottom around 70p and have seen the value of their holdings quadruple in little over a year. Profit expectations have been pushed higher, the fire sale has been completed without causing too much damage and there are prospects for a resumption in the dividend in 2018.

Even those who subscribed to the rights issue at 125p have more than doubled their money.

At least I understand Biffa’s business. I stayed away from Glencore because I don’t really understand what it does, and I suspect few if any other people do either. The shares dipped 2.5% the day after the latest results on profit taking. Given this group’s past record I think those who are cashing in are eminently sensible.

Hope for OPEC?

So the oil producers who form OPEC were serious after all. They have agreed to not only cap production but reduce it, quite an achievement. The price of crude has doubled from $27 a barrel in February to around $54 this week.

Shares in Royal Dutch Shell (RDSB), in which I hold a stake, and BP (BP.) initially jumped on hopes that crude would soon reach $60. I wouldn’t chase them higher. OPEC members have a history of cheating on their quotas.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Biffa PLC250.00 GBX0.60
BP PLC511.90 GBX1.03
Glencore PLC245.35 GBX-0.06
Royal Dutch Shell PLC B2,331.00 GBX0.34

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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