Readers who followed our last tip on Renew (RNWH) (Buy, 85p, 24 July 2012) would be quids in with the shares up 75 per cent since then. Anyone who didn't will be pleased to hear this one still has considerable room to run, hence we are back for more. Our first tip was predicated on Renew's shrewd move to transform itself from a predominately construction business to a predominately engineering services business. With 2011's transformational acquisition of AMCO now fully absorbed, that strategic shift has been successfully achieved and the upside now comes from the clear momentum that has been established.
- Market leading positions in attractive markets such as energy
- Good order book momentum
- Construction arm picking up
- Still on sub sector rating
- Margins on low side
- Contract renewal risk
In May, Renew said its engineering services order book was up 14 per cent year on year in the first half to £261m with all the forecast revenue for the second half of the year fully secured. And the positive momentum appears to have carried into the second half, with the recent trading update highlighting good order flow in all segments.
Engineering services, which contributed just over 80 per cent of group operating profit at the first half, is focused on three key areas - energy, environmental and infrastructure. Renew's nuclear business is a key driver of growth at the moment. It is the largest mechanical and electrical contractor at Sellafield, and is also active at eight other UK nuclear sites, and nuclear looks set to be an area where spending will continue to flow following the recent green light for the UK's next generation of nuclear power plants. Renew also has well entrenched positions in the infrastructure and environmental sectors. The company is the only national provider of engineering maintenance services for Network Rail and has strong links with Northumbrian Water, which led to further awards on the water company's key waste water project during the first half.
RENEW HOLDINGS (RNWH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 148p | MARKET VALUE: | £88m | |
| TOUCH: | 146p-149p | 12M HIGH: | 151p | LOW: 80p |
| DIVIDEND YIELD: | 2.3% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 20p* | NET DEBT: | 27% | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 290 | 4.60 | 6.00 | 3.00 |
| 2011 | 353 | 8.20 | 9.30 | 3.00 |
| 2012 | 337 | 10.00 | 13.3 | 3.15 |
| 2013** | 352 | 10.6 | 13.8 | 3.30 |
| 2014** | 388 | 13.0 | 16.5 | 3.45 |
| % change | +10 | +23 | +20 | +5 |
Normal market size: 3,000 Market makers: Beta: 0.58 *Includes intangible assets of £29m, or 48p a share **Numis Securities estimates, underlying PTP and EPS figures | ||||
Prospects also appear to be improving for Renew's cyclical construction business which focuses on new build affordable housing and high quality residential projects in the south. Granted, in the first-half delayed awards of projects meant revenue almost halved to £42m, but the forward order book was up to £100m from £75m, and Renew said activity is expected to accelerate in the second half.
Operating margins in specialist building are still on the low side at 2.4 per cent in the first half, but that was a big improvement from 1.3 per cent in the comparable period and that helped drive a pick up in the company’s overall operating margin to 3.4 per cent from 2.6 per cent. Analysts believe there could be more to come, noting that AMCO made a 6 per cent plus operating margin in the past.
