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The weakness of recycling channels in industry is a recurring point of tension in the debate on the transition to a less resource-intensive economy. In the world of listed companies, a few players are positioned on this theme. Alongside large generalist groups like Veolia, there are medium-sized specialists. Befesa is one of them.
This company listed in Germany is the leader in the recycling of steel dust and aluminum salt slag. Analysts estimate that it has almost half of the market in Europe and the United States. It is also a key player in South Korea, Turkey and recently in China. Befesa’s journey is unique. The company was founded in the late 1980s in Spain. Its CEO is also Spanish, as is part of the management team. It counts among its main shareholders the famous Corporacion Financiera Alba, of the March family, one of the largest private investors on the peninsula. Befesa was listed in Madrid in the past, before passing into the hands of the Abengoa group in 2000 and then being sold to Triton in 2013. It was this investment fund that orchestrated the return to the stock market in 2017, but in Germany this time. A choice dictated by the proximity of the group’s major clients and by a larger pool of investors than in Spain.
In 2022, the company made 79% of its revenue from steel and 21% from aluminum. The business model is relatively simple. The steel division collects and recycles dust and residues generated during the production of raw, stainless and galvanized steel in electric arc furnaces. Befesa extracts zinc oxide from it, which is sold to zinc smelters. The company earns money both through its collection and recycling services, but also by reselling this zinc oxide. More marginally, it returns other recycling products to its customers, such as nickel and chromium. The aluminum division collects and recycles hazardous waste from the primary production cycle. On the same principle, it recovers concentrates and aluminum to resell them or produce secondary aluminum alloys, which are then sold in specific sectors, in particular the automobile.
A high level of margin
The market in which Befesa operates is constantly growing, driven internally by the strengthening of environmental standards and the benefits of the circular economy. Barriers to entry are relatively high, because manufacturers need reliable and efficient partners to fulfill their own regulatory obligations. Befesa is therefore a privileged interlocutor, which has proven processes. The proof in figures with an activity in progression, which generates high level margins for the sector: 14.5% of operating margin and 9.4% of net margin last year. The valuation is rather moderate, even if you have to be wary of the PER based on the net profit, which makes the bride a little too beautiful. Based on free cash flow generation, the stock is less cheap, due to the wave of investment that has been made recently, particularly in China.
On the other hand, the indebtedness is a little high. If we had to add another downside, it would be the inherent cyclicality of the activity. Befesa’s momentum depends on the health of its metal-producing customers. Its product resale business is driven by the same underlying trends that drive prices in the trading market. Consequently, the visibility is quite good, but the file is not as defensive as its sign “Recycling and circular economy” suggests. Nevertheless, Befesa remains a fairly rare company, at the crossroads of the major trends of the industrial transition towards more sobriety.