Clear skies ahead for Renew

After stripping out acquisition-related and recurring rail revenue, the core engineering services business - which accounts for about 85 per cent of sales - generated organic growth of more than a fifth in 2015. Other revenue comes from the specialist high-end residential market. The group has already hit its 2017 £500m revenue target, which has resulted in significant analyst upgrades to earnings forecasts for this year and next. And management has flagged a potential increase in acquisitions this year, which will build on its record of having self-funded six major purchases over the past nine years. We think this, along with Renew's organic growth momentum and ongoing progress towards its 2017 target of a 4.5 per cent operating margin (see table), will drive further upside for investors in the Aim-traded group.

Renew: the sales and margin ascent

Source: Company (excludes prior year adjustments), Numis Securities forecasts for 2016 and 2017

Renew's engineering services won contracts from major players in the water and energy sector in 2015, helping boost the group-wide order book by 14 per cent to £502m. Longstanding relationships with water providers including Northumbrian Water and Welsh Water mean Renew has benefited from the start of investment for the AMP 6 regulatory period. Environment Agency spending on flood alleviation and prevention has also helped performance, and rail work caused by winter storm damage could result in some high-margin short-term wins.

Nuclear decommissioning is arguably the most long-dated and significant source of income. Renew operates across 15 nuclear sites after being appointed by the UK's largest nuclear decommissioning company, Magnox, as the sole provider of a £30m four-year framework providing maintenance and asset improvement work across 10 sites.

Management confidence was reflected in a 40 per cent dividend hike last year. The balance sheet also looks good with net debt falling in the last financial year from £16.1m - which reflected an increase due to acquisitions - to £4.8m. And management expects the company to have net cash before the end of the current financial year.

Not all of Renew's markets are in entirely good shape. Increased M&A activity in the wireless telecoms market has resulted in a more volatile marketplace. However, the fact that demand for 4G mobile internet access continues to outstrip supply suggests a pick-up may be on the cards, as could be the case for the gas mains replacement business, which was slow last year.