Does Renew Holdings deserve premium rating?

In the dark days of summer 2009, as the market began its fledgling recovery from the financial crisis, there were bargains to be had. Turns out Renew Holdings was one of them. In the past eight years its share price has surged by 2,030%, up from 23p to a high of 490p, and latest record results suggest the business has further potential.

Renew, which runs engineering contracts for nuclear power plants, Network Rail and London Underground, increased adjusted pre-tax profit by 11% in the six months ended 31 March to £12 million. With revenue up 9%, adjusted operating profit margin rose by 20 basis points to 4.2%.

At the core engineering services division, operating profit jumped by 14% to £11.9 million on sales up 6% to £234 million. Margin was 5.1%, underpinning management expectations of hitting its group margin target of 4.5% for the full-year.

The order book is steady at £517 million, and expected revenue for the second half of the financial year is fully secured, we're told.

Chief executive Paul Scott told me there were "no real standouts" during the first half, but that income momentum from two clients in the water sector - just beginning the third year of its sixth asset management period (AMP6) of investment - were "helpful".

And the £7 million acquisition of Giffen Holdings in November is already paying off, broadening the services offered to the rail industry. Previously, Renew did not offer electrical control and power distribution services. It does now.

It's also gained London Underground as a client, which it might otherwise have struggled to do. And Giffen is also becoming more ambitious in the jobs it pitches for, which can only be good for business.

And management is smart enough to know when it's time to cut losses, too, exiting their loss-making low pressure, small diameter gas pipe replacement business. It's meant booking a £5.8 million non-cash impairment charge, and there'll also be redundancy costs, but it does focus the unit on higher margin medium pressure work, which should get the gas operation back into profit next year.

Renew will also swing from net debt of £3.5 million, because of the acquisition, to net cash by the end of September. With the interim dividend hiked by 13% to 3p, the total payout for the 12 months is tipped by analysts to reach at least 9p.

That gives a prospective yield of 2%. It's not the most generous, but it is expected to continue growing in the double digits.

At 459p, Renishaw trades on a forward price/earnings (PE) ratio of 14, although City estimates only factor in mid-single-digit earnings per share growth, suggesting share price progress from here might be more sedate.

However, Guy Hewett at finnCap argues that Renew is still cheap. "Renew's strong track record of delivering essential services on large, long-term frameworks can command a higher rating," says the analyst, repeating his 586p price target.

Howard Seymour at house broker Numis Securities repeats his 'add' recommendation and 500p target, which would put Renew on a PE of 14.5 based on profit forecasts for 2018.

There is an interesting chart formation here, too (see trendlines drawn on chart above), which might imply that a breakout either way is possible soon. One to watch.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.