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Renewing old acquaintances

Renewing old acquaintances
May 20, 2015
Renewing old acquaintances

To recap, I issued a strong buy recommendation on the shares last summer when the price was 258p, targeting fair value of 330p (‘A small cap break-out’, 14 August 2014). By early October Renew’s share price peaked out at 327p which prompted some profit taking. But I still felt there was a decent chance of another run up to that 330p level when I updated the investment case at 295p (‘Small cap trading updates, 26 November 2014). The latest results fully vindicate that view, so much so that I believe that the multi-decade share price high could be taken out shortly.

 

Bumper results

In the six months to March, Renew increased both revenues and adjusted operating profit by 21 per cent to £252m and £9.8m, respectively, albeit with the benefit of a number of earnings enhancing acquisitions which I outlined in my analysis when I initiated coverage last summer. And with the order book up 28 per cent to £471m, of which the company’s important engineering services division accounted for £382m, then Renew has secured all of its expected second-half revenue. Although acquisitions clearly helped, organic growth of 15 per cent in the period-end order book was still eye-catching.

This robust operational performance now means that WH Ireland’s revenue forecast of £475m for the 12 months to end September 2015 is virtually in the bag and so is the broking house’s prediction of a 21 per cent rise in pre-tax profits to £19.6m to deliver a near 20 per cent hike in EPS to 24.9p. Furthermore, with the company’s net debt cut from £16.1m to £13.9m, buoyed by an operating cash inflow of £5m, and guidance for a further reduction in borrowings in the second half, Renew’s board have decided to hike the interim payout by 50 per cent to 2.25p a share. This prompted Mr Spoliar to raise his full-year dividend forecast from 6p to 6.75p a share.

On this basis, the shares are currently being priced on 12.6 times fiscal 2015 earnings estimates and offer a prospective dividend yield of 2.1 per cent. That’s hardly an exacting valuation for a company that is conservatively expected to grow revenues by just under 5 per cent to £498m next financial year and increase pre-tax profits and EPS by mid-single digits to £20.7m and 26.7p, respectively.

WH Ireland now forecast a dividend per share of 7.5p in fiscal 2016, a 9 per cent upgrade, which means that Renew’s shares are priced on a modest 11.8 times next year’s earnings estimates and offer a decent 2.4 per cent forward dividend yield. That payout could feasibly be more because Renew’s board is targeting group revenue of £500m and operating margin of at least 4.5 per cent within the next couple of years, implying operating profits of at least £22.5m. The current operating margin is 3.9 per cent so a 60 basis point increase in margin on a turnover of close to £500m equates to a profit increase of £3m. From my lens, next year’s earnings estimates are looking increasingly too conservative.

 

Contract wins underpin forecast revenue growth

Indeed, the company continues to win new contracts including a £14m framework award from its long-established client, Northumbrian Water, for sewage repairs and maintenance work, and has seen strong activity in rail where it’s the national leader in engineering skills for works on tunnels and bridges, and specifically civil, mechanical and electrical engineering services. Following its high-profile repair works to the Great Western Main Line railway infrastructure at Dawlish, Renew has subsequently carried out a further £12m of sea defence work on the line, highlighting the high esteem in which the company’s work is placed by key clients.

Importantly, the technical indicators are supportive of a chart break-out above the 330p price level. For instance, the moving average convergence divergence (MACD) momentum oscillator is positive and above its signal line; the share price is not over extended above its short-term trend line, the 20-day exponential moving average (EMA),which is currently positioned at 295p; and the 14-day relative strength indicator (RSI) has a reading of 70, so is not yet in extreme overbought territory. For good measure, the weekly RSI is way below the level which marked last autumn’s share price highs.

So with the technical set-up positive, full-year results virtually in the bag, and offering 19 per cent upside to my new target price of 375p, I rate Renew’s shares a decent buy on a bid-offer spread of 312p to 315p. Buy.

 

Dialling the right tune

The high-yielding shares in Isle of Man telecom company Manx Telecom (MANX:198p) have finally made a decisive move through the January all-time high of 190p into blue-sky territory. Admittedly, the chart break-out has taken longer than I anticipated when I updated the investment case at 189p (‘A triple play of chart break-outs’, 11 February 2015), but is worth following nonetheless as I feel that a rally to my fair value target price of 210p is on the cards. If this target is achieved, the company’s equity would be valued at £237m and after factoring in net debt of £54m, its enterprise value of £291m would equate to a multiple of 10.8 times annual cash profits of £27.1m.

Moreover, with the final dividend of 6.6p a share for the 2014 fiscal year due to go ex-dividend on 28 May, then after factoring in this payment there is potentially 10 per cent share price upside on the table. The technical indicators are all positive: the MACD momentum oscillator issued a bullish cross-over buy signal on Tuesday, 12 May; the 14-day RSI is in the high-60s, but below the overbought mid-80s level that ended the rally in January; and the share price is not overextended above its short-term trend line as the 20-day moving average is just shy of 190p.

Importantly, the fundamental case for investing is strong too, as highlighted by the company’s full-year results on 14 April. Cash profits of £27.1m easily cover the £11.1m cost of the 9.9p a share full-year payout, while enabling the company to invest in its business including launching a superfast '4G' wireless network, expanding its data centres and rolling out faster broadband. And with balance sheet gearing only 60 per cent of shareholder funds, and net debt a modest 2 times annual cash profits, the company has the flexibility to continue doing so.

So having first recommended buying Manx Telecom’s shares at 164p ('High yield telecoms play', 15 May 2014), and underpinned by a prospective dividend yield of 5.3 per cent based on a raised payout of 10.4p this year, the Aim-traded shares continue to rate a solid investment on a bid-offer spread of 195p to 198p. Buy.

Please note that I published an article with all the share recommendations I have made this year at the end of last month.

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'