Renewi's growth prospects not priced in

Renewi focuses on 'waste to product' services, processing waste material into something useful – for example, taking construction waste and turning it into aggregates. Its four divisions are separated by the type of waste each processes: commercial waste accounts for 65 per cent of pro-forma revenues, hazardous waste 13 per cent, monostreams (waste glass, wood and electricals) is a little over 11 per cent and municipal waste is around 12 per cent. The group was formed early last year following the merger of Shanks and Van Gansewinkel Groep, two waste management companies with a strong presence in the Benelux region. The rebranded group has maintained its heavy focus on the region, generating 80 per cent of its sales there.

The merger is expected to generate €40m (£35m) of synergies by 2019-20, and early indications have been promising. Results for the full year to March 2018 show synergies of €15m have already been generated, ahead of a €12m target in the first year.

Worries about prospects for Renewi and similar waste processors arose early last year when China's government introduced higher standards on imported recycled paper and plastic in July 2017 as part of its 'National Sword' initiative. This has had a huge impact on prices, with the price of recycled cardboard falling from €155 a tonne last July to lows around €70 a tonne in March.

Despite investors' fears, Renewi is well positioned to handle the policy shift. It is not materially exposed to plastic, and 80 per cent of the commercial division’s paper output is subject to 'dynamic' pricing, meaning that changes in paper pricing are passed on to the waste-producing customer without affecting Renewi’s margin. In addition, analysts at broker Numis note that an emphasis on the segregated collection of recyclable products in both Belgium and the Netherlands meant Renewi's products are higher quality and therefore less affected by restrictions. Price changes cost Renewi around £3m in the year to March 2018, and may cost another £4m this year.

However, one area investors should keep a cautious eye on is the group’s municipal division. Losses widened to £9.2m in the last financial year due to margin pressure on refuse-derived fuels, one of the division’s main products, and lower prices for recycled paper and plastic. Renewi has also struggled with onerous contracts and operational issues at some facilities, leading to £73m of exceptional charges in the year to March 2018. However, it has brought in a new managing director, James Priestley, an experienced operator in private equity portfolio companies, to turn the division around.

The group also remains highly geared. Year-end net debt stood at £439m, which is slightly higher than the pro-forma figure for a year earlier, but was lower than expectations at 2.9 times cash profits when Renewi's borrowing covenants limit the ratio to 3.5 times.