Renew your faith

About four-fifths of Renew’s revenue and 90 per cent of profit comes from its engineering services division, which works across the UK’s large infrastructure networks such as rail, water and nuclear. Given the national importance and advanced age of such assets, spending on maintenance and improvements is necessarily high and is largely dictated by regulators. The complex nature of much of this work makes it difficult for new players to enter the market, and the work on offer appears to be growing. In the six months to March, the engineering services order book rose a hearty 9 per cent, and orders should be boosted further by what should prove a canny recent acquisition.

In May this year, the group announced the £80m acquisition of QTS, a specialist rail contractor based in Scotland, funded by a £45m share placing at 355p plus debt. The group completed a similar purchase of another rail specialist, Giffen, in November 2016. Both QTS and Giffen are longstanding providers to Network Rail and, in Giffen's case, London Underground. Since the Giffen acquisition, Renew has successfully cross-sold services to its customers from its existing Amco business, providing a blueprint for the integration of QTS, which will expand Renew's geographic footprint.

However, the recent acquisitions are of most significance due to their timing, which is ahead of a new five-year Network Rail spending cycle that starts next April. The Department for Transport has proposed a 17 per cent increase in total spending over the period, to £47.9bn, and a focus on maintenance spending means broker Numis estimates that Renew's markets will expand by 25 per cent. That suggests the 9 per cent upgrade the broker made to its 2019 EPS forecasts following the announcement of the QTS deal may be just the beginning of an upgrade cycle.

Any positive trend would come as a big relief to shareholders following a slew of challenges. The group sold off its long-suffering small-diameter gas pipe business, Forefront, in February for a "de-minimis" sum and took a £9.9m non-cash impairment charge in the half year based on the value its accounts had previously put on Forefront's assets. A weaker performance from the specialist building division and a hit from adverse weather also weighed on the first half. The company has also reported slow payments from clients, although this appears to be alleviating.

However, management has recently been more picky about the work it takes on, which helped the underlying first-half operating margin increase from 4.6 per cent to 4.9 per cent. Numis forecasts further increases, to 5.4 per cent in 2018 and 6.1 per cent in 2019, assisted by the double-digit margins of the acquired QTS business.