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Renew maintains margin despite cost pressures

Outlook for end markets remains strong but wage pressures mount
Renew maintains margin despite cost pressures
  • Operating margin widens to 5.5 per cent
  • Order book grows to £771mn

The big share price swings suggest otherwise, but it’s been six months of steady progress for infrastructure contractor Renew (RNWH).

Of course, the company has faced similar pressures as the broader contracting industry in terms of materials shortages and supply chain inflation, but chief executive Paul Scott says it has managed to schedule jobs in a way that mitigates the former, while cost recovery clauses in its contracts mean the latter hasn’t damaged its margins – its statutory operating margin edged up by around 50 basis points to 5.5 per cent.

It is facing pressure in terms of wage demands, though, with Scott acknowledging that it may have “to do something different this year to what we’ve done in previous years” when it comes to looming cost of living reviews with staff. Staff turnover has crept above the sub-10 per cent level Renew has typically enjoyed, which is well below the industry’s average, but the company has also grown the total size of its workforce to meet demand growth – its order book edged up to £771mn by 31 March, from £749mn six months earlier.

Renew’s shares enjoyed a spectacular run-up last year, increasing in value by two-thirds to £8.72 by mid-December before crashing back to just over £5 in March as the macroeconomic environment worsened.

It benefited from the positive outlook for infrastructure following a series of UK government announcements to invest more, with £650bn of projects in the pipeline as of August last year. However, doubts about the commitment to this programme grew following Russia’s invasion of Ukraine given the additional fiscal pressures. Scott said that if Renew was pinning its hopes on major pieces of capital expenditure he “wouldn’t be as confident” as he is about its outlook.

“But that is not our space,” he said, noting that much of its revenue comes from essential work such as replacing rail tracks and water mains or decommissioning nuclear sites.

Broker Peel Hunt, which last week forecast an increase in infrastructure output to £30bn by by 2023 from a pre-pandemic level of £22.9bn, maintained its full-year adjusted earnings target on Renew to 54.5p per share. Its shares currently trade at 13 times this level ,which doesn’t seem like too taxing a valuation given its growth prospects. However, mindful of the impact of wage inflation from its directly-employed workforce (which stood at about 3,700 at the start of its financial year), we temper our recommendation from buy to hold.

Last IC View: Buy, 845p, 9 Dec 2021

TOUCH:710p-714p12-MONTH HIGH:889pLOW: 576p
Half-year to 31 MarTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
% change+9+20+17+17
Ex-div:09 Jun   
Payment:13 Jul   
*Includes intangible assets of £165.5mn, or 210p a share