Engineering services has long been the driving force behind improvements at Renew (RNWH). The group has seen its sales and order book grow consistently in the division in recent years, boosted further by efforts to increase the quality of earnings. As a result, adjusted operating profit was up more than 16 per cent at the last update. The groups latest trading update, released in April, continued this theme, with management expecting to report an increased forward order book at the half year. Growth in engineering services came predominantly from the infrastructure and environmental sectors.
The group reports its results for the six months to March 2018 in May, and investors will be hoping for news that will push the shares up to where they were at the start of the year. The share price fell 19 per cent at the end of January as the group released its pre-annual meeting trading statement, which warned that some public sector customers were paying more slowly than usual, and announced the retirement of chairman Roy Harrison. The share price continued to fall until management announced the disposal of Forefront in early February.
The sale of that business marked the groups willingness to cut its losses. It had originally intended Forefront to exit its lossmaking low-pressure small-diameter gas pipe replacement activities, but when by the fifth month of the year the remaining business had shown no signs of improving financial performance, management sold it for a minimal price and took a £9m write-down on its balance sheet.
Looking ahead, the question to answer will be how far the groups engineering division can grow. It carries a good mix of work across energy, environmental, specialist building and infrastructure projects. This diversification may come in useful in coming years as investment in water infrastructure in which the group does a lot of work will likely wind down as the AMP cycle reaches its end and water companies prepare to submit their business plans for the next period. Investors should look for further increases in the order book, whether the group looks likely to slip from its year-end net cash target and whether any progress is being made on margins.
At 383p, shares in Renew now trade at 11 times forecast earnings, well below where they have been trading in recent times. With the disposal of Forefront the group is well positioned to improve its margins and deliver further growth. Buy."
"Kevin added: "The past 12 months have been fantastic for Seymour Civil Engineering. We have started work on a number of really exciting, wide ranging projects across a number of industries for public and private clients located right across the North East, further cementing our position as a leading independent civil engineering firm in the region."
Over the past 12 months, Seymour has won a number of other prestigious awards in recognition of its hard work within the trade. Last year Seymour won four awards at the North East Civil Engineering Contractors Association (CECA) awards."
And AMCO seem to be pretty busy - 3 news releases in the last few days:
Collaborating effectively with Principal Contractor, CPL, AMCO-GIFFENs Scotland team are delighted to report exceptional progress with critical elements of Livingston South Railway Stations reconstruction, undertaken during a 10 day line closure over Easter. Read more
Cowley Bridge Junction Western Flood Resilience Project
09th April 2018
AMCO-GIFFEN are pleased to announce that our works on Network Rails Cowley Bridge Junction Western Flood Resilience project have kicked off successfully! Read more
02nd April 2018
As the first system installation on a 100mph double track line, AMCO-GIFFEN has been working in close collaboration with Network Rail on the Level Crossing Risk Reduction project at Blackmill Lane User Worked Crossing! Read more"
"Could this AIM growth stock help you become an ISA millionaire?
Rupert Hargreaves | Tuesday, 3rd April, 2018
Renew Holdings (LSE: RNWH) is, without a doubt, one of the AIM markets best-performing stocks. Over the past two decades, this AIM growth champion has delivered a total return for investors of more than 3,600%, excluding dividends that works out at around 22% per annum according to my calculations.
Renew has carved out a niche for itself delivering essential infrastructure maintenance tasks for regulated markets within the UK. As well as organic growth, the company has grown through acquisitions. For example, last November it acquired Giffen, a specialist mechanical, electrical and power services provider in the rail market.
And despite the headwinds buffeting the broader UK construction and engineering industry, it seems Renews specialist focus and reputation is helping the company stay ahead of its peers.....
The company is also benefitting from the fact that it has a small, positive net cash balance, although due to the timing of cash flows, management expects to report a modest net debt balance for the period ending 31 March. Still, unlike some of its peers in the construction and engineering sector, Renew is cash-rich, and conservative administration of the business has allowed it to maintain a healthy balance sheet while expanding through acquisitions.
Moreover, robust cash generation has allowed the company to triple its dividend distribution to investors over the past six years. Today, shares in Renew support a dividend yield of 2.6%, and the payout is covered 3.5 times by earnings per share. As earnings continue to rise, I believe the companys dividend will head in the same direction.
So overall, as the next generation of management steps up, and the group builds on its existing strengths, organically and via acquisitions, I believe Renew will continue to produce market-beating returns for investors."
Well, RNWH seems to have recovered well from the market wobble and is rightly being treated very differently to the other contract service providers out there (MTO, Interserve etc) in the post-Carillion mess.
RNWH has matured significantly over the last 5+ years. It is now a market leader in many specialised areas with strong visibility of its earnings. You don't want to be chopping and changing your engineers on decommissioning your nuclear power station after all!
So I wonder whether now (or soon) is the time for the board to also show a more "mature" dividend policy (i.e. move towards a higher payout!). Previously, RNWH has wanted to keep its cash for acquisitions and to keep debt low. We like acquisitions when they are bought for the right price and integrated well. However, the larger (and richer) you become the more difficult it gets. The price goes up and there are often more complexities for integration.
Whilst wanting to retain sufficient cash to buy something if the opportunity presents (and always keeping debt in check), perhaps we can have a progressive dividend policy? EPS is forecast to be 34p or so in 2018, FCF over 20p and the dividend last year was 9p.
We would expect both EPS and FCF to continue to improve (particularly as the loss making Forefront has been disposed of) - albeit probably more modestly than before.
How about an intention to increase the dividend to run the cover on EPS down to x2.5 and on FCF to x1.5? That would mean say a 10% increase for the next 5 years at least whilst leaving cash and earnings to build steadily for acquisitions. Just a thought if the board are reading!
Why? Well we all like a dividend I suppose! But on a more serious note, becoming an income stock opens RNWH up to a whole new tranche of investment funds which is good for the share price as well.
Whilst I fully support your bullish view on Somero I'm afraid I'm not with you with respect to Renew. Numis is Renew's broker so I take their upgrade (as with Somero's) with a pinch of salt.
Despite it's low debt, (IHMO) Renew had a weak balance sheet at their year end. Since then a slowdown in payments from Government as noted in the recent trading statement, plus the writedown following disposal of the gas business does not help.
Take Renew Holdings (LSE: RNWH) for example. The AIM-listed engineering services group has not only proven it can turn a healthy profit, but has grown its market capitalisation more than ninefold since September 2005 without recourse to new equity.
The Leeds-based group operates a number of autonomous subsidiary businesses which provide essential engineering services to maintain and renew UK infrastructure networks. These independently branded businesses have expert knowledge in their individual markets and directly deliver engineering services aligned to the needs of clients, many of whom are responsible for the long-term maintenance and renewal of national infrastructure networks.
In its last completed financial year, the group delivered another strong set of results reflecting the companys position as a leading provider of engineering services to many of the UKs critical infrastructure assets and in particular the nuclear, rail and water markets.
Group revenue (including £2.2m from a joint venture) increased by 6.7% to £560.8m, with adjusted pre-tax profits up 13.1% to £25.2m, compared to £22.3m reported for the year before. At the end of the 2017 financial year, the groups order book stood at a healthy £511m, with a net cash position of £3.9m after the acquisition of Giffen Holdings for £7.2m during the year.
High barriers to entry
Renews share price has enjoyed spectacular growth over the past decade or so, but I think theres plenty more to come from this £250m small-cap . The regulated markets in which the company operates have high barriers to entry and, alongside the groups extensive expertise in delivering asset care and maintenance, provide strong opportunities for long-term growth.
I believe the recent sell-off is unjustified with management confirming it has no financial exposure to Carillion. Herein lies a good opportunity for contrarians to buy on weakness at just 10 times current year earnings. Income seekers may turn their noses up at the relatively modest dividend yield of 2.7%, but payouts are covered more than three times by forecast earnings, leaving plenty of room for hefty hikes in the future."
Dazed and confused ,
Apologies for confusing the names of Forefront (just sold by Renew) and Forticrete (owned by Ibstock).
An analysis of the financial losses incurred by Renew as a result of the acquisition and subsequent sale of Forefront is illuminating.
I was not surprised with the notice that Renew have sold Forticrete (at a loss.) The market reaction with a price rise, following the notice that Renew have sold (at a loss) this operation is presumably one of relief. In retrospect it's purchase not so long ago, was not a great decision given the various write downs and now disposal.
Those interested in the business might like to consider whether the Company is singly targeting to grow itself as a speciality engineering business as its reports suggest, or whether it might just be a conglomerate of a number of smallish independent and disparate engineering operations, acquired over time, that work more or less independently from one another.
Good to see RNWH being decisive and despatching Forefront, which has been a rare failure.
Crazy selling going on at these levels, especially given today's RNS reiterating:
- "The financial performance of the Group remains in line with market expectations"
- management can now "focus on the continuing growth opportunities within the remaining parts of the Group", which hopefully encompasses new opportunities arising from Carillion as well as the 5G rollout for Clarke Telecom etc.
I think that the sharp fall in the SP is clearly linked to the panic over outsourcing companies but the key question is whether it is justified or not. Especially in the case of Mitie, there was the outrageous policy of taking credit for the estimated profit of the whole of the contract, rather than over its lifetime. For Carillion, Interserve et al. it was the construction activities. We need to understand the nature of Renew's contracts and where the risks are and, most importantly, their accounting policies with regard to the timing of bringing revenue into the P and L account. The high proportion of Goodwill in the balance sheet does not help. We can ignore broker forecasts which are irrelevant in this situation imho
I would still say that down 65p or so (15% in a couple of days) is still drastic!
Is this just read across from Carillion's demise, Capita and Interserve's profit warnings etc? Personally, I always put RNWH in a different class/bracket to those companies. As Gretel says, there could be some good pickings in rail maintenance etc.
So is this just the market disliking any outsource company on the basis that contracts may be overvalued on the balance sheet? As I say, I haven't ever had the same doubts about RNWH that I did about Carillion. They are completely different beasts.
It's ironic that the share price should fall just when MPs finally voted yesterday to move out of Parliament to allow repairs to begin.
When this happens it will cost billions and should provide huge work for RNWH given their lead role at the building. Meanwhile, RNWH will continue to work on maintaining and improving the current buildings and potentially preparing the new venue too:
Finncap say Buy with a 586p price target (40% upside).
They note that "Renew could see some benefit from Carillion's demise with rail maintenance a key target", via (1) increased market share on the national network or (2) with London Underground through the Giffen acquisition. This is all "essential maintenance work".
Funnily enough, Finncap quote "Renew's strong balance sheet" and strong reputation as being attractive to ex-Carillion clients.
They believe their is "significant upside", due to:
- "ROCE significantly ahead of the peer group"
- "strong balance sheet"
- "prospect of reinvesting cash flow into enhancing acquisitions"
Trading is in line with the board's expectations......but the market seems to have wanted more! I can't see that the modest reduction in the order book warrants a 6% fall. Personally, I would say it is the quality of the order book (i.e. profit margins) that matter more.
So I am happy to sit on these - as I always have been. I'd buy more if I had the funds!
I note that the main contractor was Cavendish Nuclear Solutions.
It so happens that Cavendish Nuclear Solutions, part of Babcock, announced on Monday a 10-year contract win at Sellafield worth £95m over just the first 3 years. I suspect Shepley will be nicely involved given their record.
Finncap's quarterly note on the Support Services sector is out today. In it, they highlight how infrastructure will be disrupted by smart technology.
They highlight six companies well placed to benefit from this transformation. RNWH is one of them (I also hold DSCV, which is another):
"Renew specialises in maintenance and renewal work for UK infrastructure. Its
electrical engineering skills mean that it is well placed to help clients implement
smarter solutions. Renew also has particular expertise in the provision of 2G, 3G,
4G and Wi-Fi technologies. Communication technologies (particularly the
forthcoming 5G) are key to Smart Infrastructure."
Tejo, the spread is wide in name only - especially online you can usually deal well inside both the bid and offer prices.
The Times reports that hundreds of miles of previously closed rail lines are to be re-opened. This should bring in much additional tunnel work, maintenance etc for RNWH - presumably including lots of preparatory work:
"Rail lines axed by Beeching will reopen to tackle overcrowding crisis"
Hundreds of miles of rail lines shut under the notorious Beeching cuts 50 years ago will be reopened as part of plans to tackle overcrowding and boost capacity on the network.
The Department for Transport will announce today that bids will be invited from metro mayors to resurrect some of the 5,000 miles of tracks closed in the late 1960s. Chris Grayling, the transport secretary, said talks had already begun to reopen five commuter lines to ease pressure on a network bursting at the seams. Many are freight lines that will be redeveloped for passengers.
This includes the lines from Okehampton to Exeter and from Portishead to Bristol, a new passenger route through Birmingham and a new link from Ashington and Blyth into Newcastle. The reopening of the Varsity line between Oxford and Cambridge is scheduled for the mid-2020s.
Here's the summary page from the new Finncap note FYI:
"Essential services carefully selected
Renew provides essential repair and maintenance services for UK infrastructure. These are very large, long-term markets providing significant potential for growth, but the key to Renews model is being selective with a focus on profits rather than just sales. Hence, while underlying Engineering Services sales in FY 2017 were flat, underlying EBIT was up +12% and total EPS up 17%. With very high and rising ROCE, strong cash flow characteristics and the potential from large, defensive long-term markets, we reiterate our Buy recommendation.
Essential services. Renew repairs and maintains the UKs infrastructure. It has a strong position in the rail, nuclear energy and water markets, providing mechanical, electrical and civil engineering services.
Large end markets. Renew provides its work through framework agreements that typically last for 3-5 years, but the requirement for the work will continue
indefinitely. For instance, £3bn p.a. is being spent on nuclear decommissioning
and Network Rail has £48bn of funding for 2019-24 (up from £41bn).
Rising margins. Evidencing Renew's selective approach, operating margins rose to 4.6% in FY 2017 (2016: 4.2%) and are up from 3.5% three years ago. The risk to these margins is relatively low with the vast majority of work completed on a cost reimbursable or plus basis.
Strong cash flow. Despite the acquisition of Giffen requiring a working capital
injection in FY 2017 (as planned), operating profit conversion into cash has
averaged 103% over the past three years.
Highly differentiated. Renew employs staff directly, uses relatively little capital and completes relatively small, repeatable jobs in regulated industries where health & safety and technical competence are key. This is very different to the majority of contractors.
Target price of 586p supported by free cash flow and ROCE. We maintain our target price of 586p, which now equates to a mkt. cap/FCF of 22.4x in calendar 2017. This is still a 9% discount to wider contracting peers who generally have a much poorer track record and very different risk profile."
"You can only delay infrastructure spending for so long. That forms one of the underlying investment themes for Renew (RNWH), particularly over the long haul. The Leeds-based group provides support for the UKs infrastructure, in areas such as rail and water; where the imperative to commit funding for maintenance and renewal has moved from desirable, through to compelling, and in some cases critical.
The 4 per cent rise in the engineering services order book in the year to September is therefore welcome, not only because the division generates four-fifths of group revenue, but as it underlines an established position in long-term" and crucially "non-discretionary programmes. Another telling metric is the 40-basis point increase in the underlying operating margin. Renew has tried to boost the quality of earnings to ratchet up margins. To this end, the group has exited its lossmaking small diameter gas pipe replacement activities. However, disregard the resulting £5.8m impairment charge and amortisation, and underlying profit was 16.4 per cent up at £25.6m.
After a strong increase in the year to September, revenue at the specialist building business could reduce by as much as £35m this time around. Despite this, Renew is confident the division's operating profit will hold steady.
Broker Numis gives adjusted pre-tax profit of £26.7m for the September 2018 year-end, giving to EPS of 34.3p, compared with £25.3m and 33.1p in FY2017.
As Simon Thompson has pointed out, even a slight improvement in margins will amplify profitability, so impressive is Renew's top-line growth. With the shares changing hands at an undemanding 12 times forecast earnings, we reiterate our buy call."
"The ​Leeds-based group works on critical infrastructure assets, such as nuclear, rail and water maintenance, so money has to be spent on projects despite what is happening in the wider economy. Renew's chief executive Paul Scott said: "We are accessing non-discretionary funding programmes. Not doing them is simply not an option."
"The (Giffen) acquisition broadened our offering as a major engineering services provider to Network Rail, as well as​ ​providing services to London Underground and Train Operating Companies​," said Mr Scott.​ "The integration of Giffen is going well. We've made good progress. We are now working with London Underground. These are areas we couldn't get into before."
"Renew operate​s​ across the energy market for clients including Sellafield, SSE, Magnox​ and​ E.ON​. ​"​We are well positioned on key frameworks associated with high hazard risk reduction operations at the​ ​Sellafield nuclear site in Cumbria​," said Mr Scott​. ​"​We are strategically placed on all three lots of the ten-year​ ​Decommissioning Delivery Partnership Framework that has an estimated value of £500m with the headroom to increase to £1.5bn over the term to 2025.
"Renew was appointed as sole supplier on the national seven-year MEICA Framework for Canal and​ ​River Trust which will see ​it​ support 1,000 water assets for this new client.
At the Palace of Westminster, ​Renew said ​the cast iron roof restoration is progressing well and puts ​the group​ in a good position​ ​for future opportunities at this World Heritage site. During the year, the Courtyards Conservation Framework​ ​was extended to 2025."
i would have thought their earthmoving and land regeneration arm, VHE, was distinctly right IN the 'construction' sector? But i agree much of their rail and west cumbria business is in the maintenance side of work, but still see it as 'construction'. And therefore cyclical, as governmental whims and winds change...
There's nothing wrong with taking some profits, although run your winners is usually good advice. This is a company with its business in the UK; it's achieving steady growth of earnings etc and increasing its dividend. The PE is c21 which I don't find excessive. No debt. Boring, clear visibility of earnings etc - looks good to me.
RNWH are not in the construction sector (except for a small involvement in the niche luxury residential sector via Walter Lilly).
They are in specialist repair and maintenance areas which aren't cyclical, and which should benefit nicely from increased governmental expenditure in the forthcoming Budget.
RNWH's sectors are in the likes of nuclear, rail, flood defence etc, all of which have to have a certain - and usually increasing - level of spending each year. This spending is mostly non-discretionary, so is not subject to budgetary whims, cutbacks etc.
you like this firm, don't you Gretel... I mean i'm not complaining, having been in since pre- name change, with some early stock at 40-60p in 2005/6. But i am thinking of taking some profits once again, having done so in March (at 470p), and less sensibly in 2008 at 80p - generally the construction marketplace seems to me to be reaching (if not already past) a cyclical peak, and with Carillion & Interserve showing that there's always someone will underbid for tendered work and come a cropper, Renew's specialist market & success must be attracting competition?
Finncap have retained their 586p price target. They go for 34.1p EPS this year and 35.8p EPS next year, with 10.6p and 12.2p dividends respectively.
"Potential for enhancing bolt-ons. Net cash (excl. finance leases) was £3.9m
(2016: £4.8m) after the purchase of Giffen for £7.2m. The board expects to
have no bank debt by 31 March 2018 emphasising the potential for bolt-ons to
further strengthen the range of services and client base.
High ROCE and potential for investment. With ROCE significantly ahead of
the peer group, a strong balance sheet and the prospect of reinvesting cash
flow into enhancing acquisitions, we reiterate our Buy rating and 586p target."
And the CP6 news in particular is very important:
"Renew has reported a strong set of results with adj. PBT of £25.2m (up
+13% on last year) slightly ahead of our forecast £24.9m. Adj. EPS was up
+18% on last year and the full-year dividend raised 13%. With margins
rising as targeted, net cash and the order book up 4% supporting a positive
outlook, we do not anticipate making any major changes to our PBT/EPS
forecasts. We reiterate our view that Renews strong track record of
delivering essential services on large, long-term frameworks deserves a
Rising operating margins. Engineering Services operating profit grew +17%
on last year with operating margins rising from 4.9% to 5.6%. Operating margin
potential is supported by a very selective bidding approach, avoiding low
Continued positive outlook. Engineering Services order book is up 4% to
£438m. There remains a range of long-term opportunities but of particular note
is the Governments recent announcement that funding for CP6 will increase
from £41bn to £48bn. CP6 is the next period of Network Rail expenditure
running from 2019 to 2024. In addition to the increased funding, CP6 will focus
on both maintenance and renewals as key priorities which matches Renew's
focus and skill set."
Looks like a few early gamblers got stung this morning, but the price is bouncing nicely now. As for the Building division, this only accounts for a mere 9% of operating profit, so if revenue shows a decline this year the net profit effect will be pretty immaterial - and who's to say that this division won't show an upturn anyway or that RNWH won't operate selectively and improve margins?
It is perhaps not surprising that the price has fallen given that;
"Specialist building revenue, however, will reduce after being particularly high, perhaps by as much as £35m, it said.
"We remain confident that we will continue to deliver stable operating profits in that business," the company added."
Admittedly on lowish volume but anything near that number is a considerable drag on future profits. I can't complain because I paid 100p but I might take the top off my holding if the price goes up toward 440p
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