- Operating profit grows 25 per cent
- Cash outflow due to £34.8m spend on acquisitions
Renew Holdings (RNWH) sits in a nice space within the UK’s contracting industry.
The company avoids many of the booms and busts that have floored competitors by forgoing the highly competitive (and capital-intensive) new build market, focusing instead on maintenance and renewal work for utilities, rail and highways customers.
Procurement for this sector is generally over 5 to 10 year cycles and about three-quarters of Renew's contracts are carried out through target price arrangements, which have a mechanism allowing for adjustments to cover for exceptional cost inflation. Clients also commission work through operating rather than capital budgets, which leaves the company less exposed to downturns.
As a result, Renew has a history of steady, profitable growth, using the cash it generates to buy businesses along the way. Over the past year, it has strengthened its presence in the water sector in the South East through the £29.5m purchase of Browne in March and spent an initial £3m in May (with a further £2.3m dependent on future targets) buying rail electrification specialist REL.
These contributed to a cash outflow of around £23m in the 12 months to September but net debt (excluding leases) of £13.7m at the year-end is well covered by earnings – the company’s operating profit climbed a quarter to £41.1m.
Over the past five years, cash profit has grown by an average of about 15 per cent a year. This predictability has attracted fans among investors and its share price is up 60 per cent since the start of 2021.
Increased government spending on roads and rail mean the outlook for the sector is upbeat, though, and at 15 times’ broker Peel Hunt’s forecast earnings for next year Renew’s shares don’t look too expensive. Buy.
Last IC View: Buy, 463p, 4 Sep 2020
|RENEW HOLDINGS (RNWH)|
|ORD PRICE:||845p||MARKET VALUE:||£665m|
|TOUCH:||841-849p||12-MONTH HIGH:||889p||LOW: 482p|
|DIVIDEND YIELD:||1.9%||PE RATIO:||22|
|NET ASSET VALUE:||159p||NET DEBT:||23%|
|Year to 30 Sep||Turnover (£m)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £169m, or 215p per share.|