Renewi — ATM prudence and debt management actions

Renewi (LSE: RWI)

Last close As at 29/03/2024

GBP5.64

−1.00 (−0.18%)

Market capitalisation

GBP456m

More on this equity

Research: Industrials

Renewi — ATM prudence and debt management actions

Management flagged stronger Q4 trading, in line with its expectations. Netherlands soil remediation activities require regulatory approval and a prudent stance has been taken over resuming shipments there, which is the primary driver of our significant estimate reduction. In this light, the steps being taken for debt management, including a proposed dividend reduction, are entirely logical. Renewi’s rating is at depressed levels – we feel due to earnings uncertainty and higher debt levels – but potential resolutions to both issues are visible. The company is still yielding 4.4%.

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Industrials

Renewi

ATM prudence and debt management actions

Year-end update

Industrial support services

1 May 2019

Price

33.0p

Market cap

£264m

£/€1.16

Core group net debt (ex PPP/PFI finance, €m) at end September 2018

496.1

Shares in issue

800.1m

Free float

99.5%

Code

RWI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

40.6

29.6

(53.8)

Rel (local)

37.5

21.9

(53.2)

52-week high/low

86.9p

21.9p

Business description

Renewi is a waste-to-product company with operations primarily in the Netherlands, Belgium and the UK and was formed from the merger between Shanks Group and Van Gansewinkel Group in 2017. Its activities span the collection, processing and resale of industrial, hazardous and municipal waste.

Next event

FY19 results

23 May 2019

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Renewi is a research client of Edison Investment Research Limited

Management flagged stronger Q4 trading, in line with its expectations. Netherlands soil remediation activities require regulatory approval and a prudent stance has been taken over resuming shipments there, which is the primary driver of our significant estimate reduction. In this light, the steps being taken for debt management, including a proposed dividend reduction, are entirely logical. Renewi’s rating is at depressed levels – we feel due to earnings uncertainty and higher debt levels – but potential resolutions to both issues are visible. The company is still yielding 4.4%.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/18

1,779.1

59.1

5.5

3.5

7.0

9.1

03/19e

1,792.3

62.3

5.8

1.7

6.6

4.4

03/20e

1,799.4

49.2

4.6

1.7

8.3

4.4

Note: *PBT and EPS (fully diluted) are normalised, excluding pension net finance costs, amortisation of acquired intangibles and exceptional items.

FY19 in line, guidance reduced for FY20

The Commercial division had a stronger Q4 including delivering planned synergies following price increases at the start of the quarter. As seen at the H1 stage, other divisional performances remain variable but overall group profitability was as management anticipated. Cost-reduction actions are underway in all divisions to improve performance and plant efficiencies, which will strengthen the group platform for future growth. Separately, we now expect total exceptional charges, which are mainly non cash, of €80m+ in H2, over half of which (c €45m) relates to the Derby energy from waste project delays and financial difficulties at prime contractor Interserve. Other components include synergy delivery costs and proactive provisioning at UK Municipal ELWA, given possible Brexit impacts.

Looking ahead, guidance is now to expect no resumption of remediated soil deliveries from ATM in FY20, which explains over two-thirds of our 36% lower group PBT for that year (with a 20%+ reduction in FY21 also). The existing 3.5x net debt:EBITDA covenant has been extended for a further year (previously due to step down to 3.25x in June), which looks sensible given our projected c 3x end FY19 position and allowing for some normal seasonal working capital fluctuation. A flagged dividend reduction (to 1.45p/1.68c) for the year including a proposed 0.5p final, versus our previous expectation of a flat 3.5c (3.05p) payout), forms part of this debt management strategy. Previously flagged disposals (ie Hazardous, Reym, and Municipal, Canada) are said to be progressing, with the latter business at the due diligence stage, and are expected to reduce net debt in due course.

Valuation: Event-driven net debt reduction upside

Renewi’s share price has rallied to January 2019 levels but remains over 60% below its 86.9p year high (June 2018) with estimates also under pressure during this time. Factoring in our revised forecasts, the FY20 P/E has compressed to 8.3x with EV/EBITDA of 4.9x, which become 5.7x and 4.2x respectively one year further out. The group net debt position could improve significantly if disposals complete and/or the ATM position is resolved, although the timing is uncertain. Even following the proposed dividend reduction, Renewi is yielding 4.4%.

Exhibit 1: Financial summary

m's

2012

2013

2014

2015

2016

2017

2018

2018

2019e

2020e

2021e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

Sterling

Sterling

Sterling

Sterling

Sterling

Sterling

Sterling

Euros

Euros

Euros

Euros

Revenue

 

 

750.1

614.6

633.4

601.4

614.8

779.2

1,565.7

1,779.1

1,792.3

1,799.4

1,855.8

Cost of Sales

 

 

(622.9)

(511.6)

(528.3)

(506.1)

(517.8)

(653.3)

(1,276.9)

(1,402.2)

(1,467.1)

(1,474.4)

(1,520.6)

Gross Profit

 

 

127.2

103.0

105.1

95.3

97.0

125.9

288.8

376.9

325.2

325.0

335.2

EBITDA

 

 

105.0

88.4

88.5

72.6

69.2

81.6

156.9

176.3

186.8

184.0

204.3

Operating Profit (before GW and except.)

53.4

44.9

45.6

34.3

33.4

36.5

69.1

78.5

85.0

78.2

97.1

Net Interest

 

 

(10.8)

(10.8)

(12.6)

(11.4)

(11.2)

(10.3)

(14.2)

(16.0)

(16.3)

(20.0)

(17.5)

Other Finance

 

 

(6.4)

(3.9)

(2.9)

(1.5)

(1.6)

(2.2)

(5.1)

(6.0)

(7.0)

(9.0)

(9.0)

JV/Associates

 

 

0.1

0.3

0.3

0.8

1.0

2.0

2.3

2.6

0.6

0.0

0.0

Intangible Amortisation

 

 

(3.7)

(2.5)

(2.3)

(1.9)

(1.8)

(2.1)

(5.8)

(6.5)

(6.4)

(6.4)

(6.4)

Non Trading & Exceptional Items

 

 

(2.9)

(37.8)

(20.2)

(40.3)

(21.8)

(85.0)

(95.7)

(108.6)

(104.4)

(25.0)

0.0

Profit Before Tax (Edison norm)

 

36.3

30.5

30.4

22.2

21.6

26.0

52.1

59.1

62.3

49.2

70.5

Pension net finance costs

 

 

0.2

(0.3)

(0.3)

(0.5)

(0.5)

(0.3)

(0.6)

0.0

0.0

0.0

0.0

Profit Before Tax (Renewi norm)

 

36.5

30.2

30.1

21.7

21.1

25.7

51.5

59.1

62.3

49.2

70.5

Profit Before Tax (statutory)

 

 

29.9

(10.1)

7.6

(20.5)

(2.5)

(61.4)

(50.0)

(56.7)

(49.2)

17.1

63.5

Tax - headine

 

 

(4.2)

(1.1)

(5.8)

2.3

(1.5)

0.5

2.6

2.7

(15.6)

(12.1)

(16.9)

Profit After Tax (norm)

 

 

26.6

22.8

23.2

20.5

19.3

20.1

39.1

44.3

46.7

37.2

53.6

Profit After Tax

 

 

25.7

(11.2)

1.8

(18.2)

(4.0)

(60.9)

(47.4)

(54.0)

(64.8)

5.1

46.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

448.0

448.3

448.9

449.1

449.5

536.3

799.9

799.9

798.7

798.7

798.7

EPS - Edison norm (p/c) FD

 

 

5.9

5.1

5.1

4.5

4.3

3.7

4.9

5.5

5.8

4.6

6.7

EPS - Renewi norm (p/c) FD

 

 

6.0

5.0

5.1

4.4

4.2

3.7

4.8

5.4

5.7

4.5

6.6

EPS - (p/c)

 

 

5.7

(7.9)

(6.3)

(3.8)

(0.9)

(11.4)

(5.9)

(6.7)

(8.1)

0.6

5.8

Dividend per share (p/c)

 

 

3.05

3.05

3.05

3.05

3.05

3.05

3.05

3.46

1.68

1.68

2.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

17.0

16.8

16.6

15.9

15.8

16.2

18.4

21.2

18.1

18.1

18.1

EBITDA Margin (%)

 

 

14.0

14.4

14.0

12.1

11.3

10.5

10.0

9.9

10.4

10.2

11.0

Operating Margin (before GW and except.) (%)

7.1

7.3

7.2

5.7

5.4

4.7

4.4

4.4

4.7

4.3

5.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

751.6

772.1

744.4

737.3

670.4

1,420.9

1,456.3

1,661.0

1,586.6

1,593.0

1,591.7

Intangible Assets

 

 

271.4

251.8

211.1

173.8

194.5

603.3

606.3

691.1

678.1

667.4

654.0

Tangible Assets

 

 

390.9

375.3

322.7

282.9

297.0

587.4

623.0

710.8

714.6

729.8

741.9

Investments

 

 

89.3

145.0

210.6

280.6

178.9

230.2

227.0

259.1

193.9

195.8

195.8

Current Assets

 

 

233.6

247.3

265.1

224.0

177.0

348.2

366.2

418.0

399.2

373.2

374.7

Stocks

 

 

10.5

11.0

9.4

6.9

6.8

19.9

23.3

26.6

25.5

25.5

26.2

Debtors

 

 

163.3

160.9

151.5

156.3

135.5

253.4

279.0

318.4

315.3

317.1

324.0

Cash

 

 

59.8

75.4

104.2

60.8

34.7

74.9

63.9

73.0

58.4

30.6

24.5

Current Liabilities

 

 

(238.7)

(248.9)

(229.6)

(277.4)

(227.2)

(483.2)

(545.8)

(622.8)

(716.4)

(706.4)

(676.4)

Creditors

 

 

(226.5)

(230.7)

(226.3)

(202.4)

(224.8)

(466.8)

(532.9)

(608.1)

(604.2)

(594.2)

(594.2)

Short term borrowings

 

 

(12.2)

(18.2)

(3.3)

(75.0)

(2.4)

(16.4)

(12.9)

(14.7)

(112.2)

(112.2)

(82.2)

Long Term Liabilities

 

 

(375.9)

(444.2)

(504.7)

(432.5)

(434.2)

(845.7)

(894.3)

(1,019.9)

(915.3)

(914.0)

(912.7)

Long term borrowings

 

 

(253.8)

(234.5)

(253.8)

(140.8)

(224.9)

(482.4)

(489.7)

(558.9)

(489.1)

(489.1)

(489.1)

Other long term liabilities

 

 

(122.1)

(209.7)

(250.9)

(291.7)

(209.3)

(363.3)

(404.6)

(461.0)

(426.2)

(424.9)

(423.6)

Net Assets

 

 

370.6

326.3

275.2

251.4

186.0

440.2

382.4

436.3

354.1

345.8

377.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

109.9

67.7

78.6

55.8

72.2

27.9

128.4

143.3

104.3

134.4

185.7

Net Interest

 

 

(13.4)

(11.5)

(13.2)

(12.8)

(12.8)

(19.0)

(16.9)

(19.3)

(18.5)

(20.0)

(17.5)

Tax

 

 

(7.1)

1.9

(1.6)

(5.7)

(4.8)

(5.3)

(6.7)

(7.6)

(9.7)

(12.1)

(16.9)

Net Capex

 

 

(74.8)

(50.1)

(27.1)

(37.2)

(25.8)

(41.2)

(81.2)

(92.6)

(114.1)

(116.6)

(112.3)

Acquisitions/disposals

 

 

(19.6)

(59.2)

(54.1)

(67.3)

18.2

39.5

(4.1)

(4.7)

20.8

0.0

0.0

Equity Financing

 

 

0.0

0.4

0.2

0.1

0.3

136.5

0.6

0.7

(0.6)

0.0

0.0

Dividends

 

 

(13.3)

(13.7)

(13.7)

(13.7)

(13.7)

(15.1)

(24.4)

(27.8)

(27.5)

(13.5)

(15.0)

Net Cash Flow

 

 

(18.3)

(64.5)

(30.9)

(80.8)

33.6

123.3

(4.3)

(7.9)

(45.2)

(27.8)

23.9

Opening core net debt/ (cash)

 

 

207.4

206.2

177.3

152.9

155.0

192.6

423.9

492.7

500.6

542.9

570.7

HP finance leases

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

 

 

19.5

93.4

55.3

78.7

(71.2)

(354.6)

(10.5)

0.0

2.8

0.0

0.0

Closing core net debt/ (cash)

 

 

206.2

177.3

152.9

155.0

192.6

423.9

438.7

500.6

542.9

570.7

546.8

Closing PPP/PFI non-recourse net debt

 

52.0

100.1

151.2

222.6

91.1

87.1

82.9

84.6

90.5

90.5

90.5

Source: Company, Edison Investment Research. Note: *Full FY18 euro results have not been published to date; the presented P&L and cash flow statements should be taken as illustrative until that occurs.

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This report has been commissioned by Renewi and prepared and issued by Edison, in consideration of a fee payable by Renewi. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Renewi and prepared and issued by Edison, in consideration of a fee payable by Renewi. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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