Renew Share Discussion Threads

[penpont] 19/8/2019 10:50

IC tip from last week

Buy at 388p
Tip style
GROWTH
Risk rating
MEDIUM
Timescale
LONG TERM
Bull points

Assured revenues

Focus on non-discretionary UK infrastructure

New pricing regimes in rail and water

Bear points

Specialist building segment lagging

Low, but rising, profit margins

By Nilushi Karunaratne

While big capital projects that make a brave statement attract the most attention, Renew Holdings (RNWH) capitalises on the understated – yet vital – need to support the day-to-day performance of the UK’s existing – and often creaking – infrastructure. As critical assets age, the ongoing investment required for their upkeep provides long-term opportunities in essential maintenance and upgrades. Operating largely in regulated markets, committed funding programmes provide assured long-term revenues for Renew, whose engineering services order book of £531m in March 2019 (up 4 per cent from September's year-end) is underpinned by multi-year agreements, such as a 10-year programme to de-commission the UK's ageing nuclear power plants.


Focusing on the UK’s energy, environmental and infrastructure assets, Renew's engineering services division is the bulk of the business. It generated over 90 per cent of group revenue and 95 per cent of operating profit in the first half of 2018-19, up from 80 per cent and 90 per cent, respectively, in the previous first half. A record performance saw a 48 per cent surge in adjusted operating profit to £19.1m, generated on a 25 per cent increase in revenue to £282m.

As a provider of infrastructure services to Network Rail, strong momentum in the final year of the five-year rail control period, CP5, helped engineering services generate 8 per cent organic revenue growth in the first half. This was helped by the £80m acquisition of specialist rail contractor QTS in May 2018. Deriving over 90 per cent of its revenue from Network Rail at the time of acquisition, QTS is a well-established operator.

Renew's future growth – and its share rating – depends on its ability to secure maintenance contracts in the latest railway funding cycle, CR6, in which spending on maintenance will be 25 per cent higher than in CP5. Management says that Renew has kept all the CP6 contracts that it tendered for.

Because, for the most part, Renew does quick-response, high-volume, low-added-value tasks, its profit margins are relatively low. However, with a focus on the quality of earnings, its underlying operating margin has been building, rising by 1.1 percentage points in the first half of 2019 to 6.1 per cent. This was propelled by a 0.9 percentage point improvement in margins in engineering services, which hit 6.8 per cent during the period.

Renew sees further growth prospects in markets such as wireless telecommunications, where mobile internet demand is outstripping current network capacity. Investment in 4G is boosting work from Telefonica’s (BME:TEF) frameworks in the north and London and, as the next phase of mobile technology arrives, Renew has secured its first 5G-related programme.

Undertaking “high quality” residential and science projects in London and the home counties, specialist building is Renew’s smallest – and perhaps weakest – segment. In the first half of 2018-19, revenues dropped almost 50 per cent to £19m as management became especially fussy about which contracts to take. Despite this, profits still fell by almost two-thirds to £0.3m, although the order book held steady at £49m.

Reflecting the QTS acquisition, the group carried £22m of net debt at the half-year stage. Yet Renew's cash generation was particularly strong in the first half, with £10m of cash produced by continuing activities, almost a fourfold increase on the previous first half. In addition, broker Numis Securities expects Renew to have net cash in 2020.

IC View
The latest industry data shows that in July, for the third month running, UK construction output fell. But operating in non-discretionary infrastructure markets, with long-term regulated budgets, Renew should be relatively sheltered. Besides, a new pricing cycle is about to start in the water industry, which should mean extra capital spending and quite possibly extra work for Renew. Despite this, the shares are 12 per cent off their 12-month high and trade on a single-figure multiple of 2020's forecast earnings (see table). That looks a decent entry point. Buy.

Last IC View: Buy, 422p, 23 May 2019

[rivaldo] 19/8/2019 08:56

You wait ages, and then two Buy tips come along at once :o))

The IC has also made RNWH one of its main tips for the week - anyone got access?



Renew on track for further growth"

[rivaldo] 16/8/2019 13:54

Cheers Millerman1007, that reads positively and is reasonably well summarised, which makes a change.

[rivaldo] 16/8/2019 08:56

RNWH are tipped in today's Questor column in the Telegraph - anyone got access to the full article?



"Questor: sales up, profits up, dividend up. Why are Renew’s shares no higher than in 2016?

Questor Income Portfolio: the engineering firm has made a success of a large acquisition and is growing nicely, but the market seems not to have noticed

It is time that we took another look at Renew Holdings, the engineering services company that last year embarked on a significant takeover. We said then that we tended to take a sceptical view of the claimed benefits of large acquisitions and would keep a close eye on progress.

Happily, we can report that the takeover, of a firm called QTS, shows every sign of success......

[cockerhoop] 03/8/2019 15:30

Avoided cycling into the Goyt Valley today!

[wad collector] 02/8/2019 17:59

Good thought.I like the angle.
Just as well the Victorians knew how to build dams, I would be more worried by the post-war constructions.

[rivaldo] 02/8/2019 13:24

The news today is headlining with the possible collapse of the Whaley Bridge dam in Derbyshire. The reporter suggested that there may be a need for a major review of dams in the UK, bearing in mind the age of many of them (100 of them were built in the Victorian era).

So it's encouraging then that in their last Annual Report, RNWH stated:



"We have developed an expertise in dam safety, a new market where we see growth opportunities and during the year the Group delivered major schemes at the Llanishen and Talybont reservoirs."

[wad collector] 30/7/2019 17:23

It does seem a bit of an enigma , especially as Rivaldo points out , a lucrative and long term decommissioning contract extension. Buy and prosper? I have rather too many already in my portfolio but don't worry about this one.

[igoe104] 30/7/2019 13:56

Surprised this has fallen recently, especially with the government fully intent on spending billions on upgrading the railways.

[rivaldo] 29/7/2019 08:58

Excellent news - the Sellafield agreement for a major major framework decommissioning contract has been extended to 2026.

As outlined below, this involves continuing work for RNWH's Shepley Engineers in two of the three available lots, with "work through the framework which has been much broader than the vast decommissioning remit":

[rivaldo] 08/7/2019 10:20

RNS - encouraging that an NED has now seen fit to make his maiden purchase of shares in the company at 414p for £21,000's worth:

[harrogate] 07/7/2019 16:48

There has been lots of great news flow on rail especially and the building side but we need to see that turn into growth in EPS as 40p this year and 42p next year doesn't get the pulse racing and we seem to be stuck at 10 times. To get to £5 I would think we would need to see some upgrades on 2019 ( probably unlikely at his stage ) or 2020.

[wad collector] 05/7/2019 18:10

Sp recovery seems to have lost steam a bit recently . Looked like it was going back to a fiver but then dropped off despite the good news flow. I guess most of us here are long so not that bothered.

[rivaldo] 26/6/2019 15:19

RNWH's AMCO have been named today as a winner in the second £215m tier of signalling framework contracts from Network Rail.

Since fewer contractors have been named, in a deliberate move, I'd assume this will mean an increased slice of the pie for those involved.

The third framework involves "major" signalling works, so I assume this is much larger, and will be disclosed in January:



"26 June 2019
Network Rail awards signalling framework contracts worth £215m"

"The awarded contracts represent 17 route-based lots. It includes two framework contractors for seven of these routes and three framework contractors for the Western route.

The winning contractors include Balfour Beatty, Volker Rail, Amco, Amaro Signalling, Amey, Linbrooke and OSL."

[rivaldo] 20/6/2019 15:30

1.1m shares through at 422p this lunchtime. Hopefully clearance of an overhang.

[rivaldo] 12/6/2019 09:15

I note that RHL have gone into administration. Not sure if their nuclear decommissioning arm is a competitor to RNWH's Shepley?

If it is then it's good news for RNWH. If not, then perhaps it might be a tasty acquisition morsel from the administrators as a complementary business for RNWH.

[hsduk101] 10/6/2019 07:46

Why is that? All i can think of is the interim report was produced for shareholders. However that should be the same info as what weve seen last few weeks

[rivaldo] 09/6/2019 23:30

Tomorrow there should be some renewed buying interest.....

[igoe104] 29/5/2019 16:02

Can't blame them from topping up, lots upcoming frameworks, I expect RNWH to be fully involved in. I can only see the company going from strength to strength especially when HS2 starts kicking off.

[rivaldo] 29/5/2019 14:10

Octopus are continuing to buy - they now have 17.07% and 12.86m shares, up from 16.07% and 12.09m shares per their last holding RNS, so they've bought another 750,000 shares or so: