Renew on track for further growth

Focusing on the UK’s energy, environmental and infrastructure assets, Renew's engineering services division is the bulk of the business. It generated over 90 per cent of group revenue and 95 per cent of operating profit in the first half of 2018-19, up from 80 per cent and 90 per cent, respectively, in the previous first half. A record performance saw a 48 per cent surge in adjusted operating profit to £19.1m, generated on a 25 per cent increase in revenue to £282m.

As a provider of infrastructure services to Network Rail, strong momentum in the final year of the five-year rail control period, CP5, helped engineering services generate 8 per cent organic revenue growth in the first half. This was helped by the £80m acquisition of specialist rail contractor QTS in May 2018. Deriving over 90 per cent of its revenue from Network Rail at the time of acquisition, QTS is a well-established operator. 

Renew's future growth – and its share rating – depends on its ability to secure maintenance contracts in the latest railway funding cycle, CR6, in which spending on maintenance will be 25 per cent higher than in CP5. Management says that Renew has kept all the CP6 contracts that it tendered for. 

Because, for the most part, Renew does quick-response, high-volume, low-added-value tasks, its profit margins are relatively low. However, with a focus on the quality of earnings, its underlying operating margin has been building, rising by 1.1 percentage points in the first half of 2019 to 6.1 per cent. This was propelled by a 0.9 percentage point improvement in margins in engineering services, which hit 6.8 per cent during the period.

Renew sees further growth prospects in markets such as wireless telecommunications, where mobile internet demand is outstripping current network capacity. Investment in 4G is boosting work from Telefonica’s (BME:TEF) frameworks in the north and London and, as the next phase of mobile technology arrives, Renew has secured its first 5G-related programme.

Undertaking “high quality” residential and science projects in London and the home counties, specialist building is Renew’s smallest – and perhaps weakest – segment. In the first half of 2018-19, revenues dropped almost 50 per cent to £19m as management became especially fussy about which contracts to take. Despite this, profits still fell by almost two-thirds to £0.3m, although the order book held steady at £49m. 

Reflecting the QTS acquisition, the group carried £22m of net debt at the half-year stage. Yet Renew's cash generation was particularly strong in the first half, with £10m of cash produced by continuing activities, almost a fourfold increase on the previous first half. In addition, broker Numis Securities expects Renew to have net cash in 2020.