Renewi — A circular economy champion

Renewi (LSE: RWI)

Last close As at 20/04/2024

GBP5.70

2.00 (0.35%)

Market capitalisation

GBP460m

More on this equity

Research: Industrials

Renewi — A circular economy champion

The drive to increase recycling from both governments and consumers provides a positive backdrop for Renewi. Management has improved the underlying performance of the group and the 2020 programmes targeting an additional €60m of EBIT by 2026 are largely on track. This provides an attractive platform, which we expect management to expand on at the upcoming capital markets event with further granularity on the next layer of strategy to add 50% to sales by FY28.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Renewi

A circular economy champion

Pre capital markets update

Industrial support services

5 September 2023

Price

487p

Market cap

£414m

€1.15/£

Core net debt (€m) at 30 June 2023

388

Shares in issue

80.3m

Free float

98.8%

Code

RWI

Primary exchange

LSE

Secondary exchange

Amsterdam Euronext

Share price performance

%

1m

3m

12m

Abs

(2.2)

(8.4)

(35.2)

Rel (local)

(0.6)

(6.4)

(36.2)

52-week high/low

741p

450p

Business description

Renewi is a leading waste-to-product company in some of the world’s most advanced circular economies, with operations primarily in the Netherlands, Belgium and the UK. Its activities span the collection, processing and resale of industrial, hazardous and municipal waste.

Next events

Capital markets event

4 October

Half year results

9 November

Analyst

David Larkam

+44 (0)20 3077 5700

Renewi is a research client of Edison Investment Research Limited

The drive to increase recycling from both governments and consumers provides a positive backdrop for Renewi. Management has improved the underlying performance of the group and the 2020 programmes targeting an additional €60m of EBIT by 2026 are largely on track. This provides an attractive platform, which we expect management to expand on at the upcoming capital markets event with further granularity on the next layer of strategy to add 50% to sales by FY28.

Year

end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/22

1,869

105.3

98

0

5.7

0.0

03/23

1,892

103.7

90

0

6.3

0.0

03/24e

1,925

92.4

81

5

6.9

0.9

03/25e

2,007

104.0

92

10

6.1

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Improving financials and 2020 projects progressed

Underlying performance has improved significantly over the last four years (FY19–23); operating margin improved from 4.8% to 7.0%, EPS from 59c to 90c and post tax return on capital employed from 8.0% to 10.3.6%, despite headwinds in some areas such as the UK PFIs. In 2020 Renewi set out on an ambitious programme to generate €60m of additional EBIT through three programmes: Renewi 2.0 digitalisation and restructuring, which is now complete; €100m of new project investments, where the key project for advanced sorting lines (€60m of investment) is now coming on stream with the first plant operational; and ATM turnaround, which is in place albeit delayed by about two years due to additional legislation and COVID-19. These programmes and underlying performance provide confidence in management’s ability to deliver on its strategy.

Capital markets day to highlight future opportunities

Management recently set a target to increase revenues by 50% by FY28 through a combination of organic growth and corporate activity. We expect the capital markets event to include further details on the attractive segments on which management intends to focus, including underlying legislative dynamics and, potentially, the next round of investment programmes. Inevitably we expect more limited details on the acquisition strategy, albeit we note the recent €400m RCF providing €300m of headroom before a further €150m extension option is considered.

Valuation: 35% discount to DCF/peer-based valuation

Our DCF valuation comes to 825p a share using a conservative WACC of 9.5% and a terminal growth rate of 2% (note a reduction from the previous 926p due to a more conservative approach on provisions). Our peer group analysis (EV/EBIT, EV/EBITDA and P/E based) suggests a valuation of 724p. The average of the two provides our valuation of 775p, which we note still only translates to P/E of 11.1x for FY24. Significant recent corporate activity including Biffa, Augean and Filta deals in the UK. Using an average of these take-out valuations and adjusting for a 35% control premium provides a reassuring valuation of 1,238p a share for Renewi.

Capital markets day: The next growth cycle

Renewi is holding a capital markets event on 4 October. At the FY23 full year results management set out a target to grow the top line by 50% by FY28, as highlighted in Exhibit 1. Along with a target for ‘high single-digit EBIT margin’ against the FY23 margin of 7.0%, this would suggest at least a similar uplift to operating profit. We expect the event to focus on these growth plans and the underlying dynamics driving these opportunities.

Exhibit 1: Management’s five-year plan to accelerate top-line growth

Source: Renewi

Management’s last set of medium-term initiatives was announced in 2020 with a goal of generating an additional €60m of EBIT, €20m per initiative, through three discrete avenues:

Renewi 2.0. An internal programme to digitalise and streamline operations to improve both customer interface and generate efficiencies.

Additional investments. €100m of investments in new projects to accelerate the group’s organic growth.

ATM turnaround. Addressing the impact of new legislation on the soil remediation business, which had become loss-making.

This report looks at Renewi’s recent performance and delivery of these initiatives along with the underlying market dynamics for the group, which we expect to be further developed in the capital markets event.

Circular economy: A positive backdrop

The broader sustainability agenda has arguably been focused on climate change and carbon- related emissions, but there is increasing realisation of the wider issues of the natural world and human consumption. This is perhaps best highlighted by ‘Earth Overshoot Day’, the date when all the biological resources that the Earth (nature) can renew during an entire year has been used up. In 2022 this was 28 July, see Exhibit 2, or to put it another way, we are using up 75% more resources in a year than the natural world can sustain. Overshoot Day for Belgium was 26 March, the Netherlands 12 April and the UK 19 May.

This has led to calls to reduce the consumption of nature’s resources, a key driver to the solution being seen as a move to a more circular economy employing strategies such as:

Narrowing the loop – use less resources per product and substitute primary with renewably sourced materials.

Slowing the loop – longer product life and more intensive use through reuse and repair, which slows down the demand for new raw materials.

Closing the loop – increasing end of life recycling, preventing material loss.

In practical terms, many of these strategies involve the ‘hierarchy of waste’ as highlighted in Exhibit 3, moving away from disposal, primarily landfill or incineration, to various forms of repurposing or recycling.

Exhibit 2: Earth Overshoot Day

Exhibit 3: Hierarchy of waste

Source: datafootprintnetwork.org

Source: DEFRA

Exhibit 2: Earth Overshoot Day

Source: datafootprintnetwork.org

Exhibit 3: Hierarchy of waste

Source: DEFRA

National governments are increasingly layering legislation to drive the agenda while corporations are also increasingly taking up the challenge.

Europe and national targets

The EU adopted a circular economy action plan in 2020 as part of its Green Deal agenda set around a target of climate neutrality by 2050 and to halt biodiversity loss. In 2022 it set out an ambition to decouple economic growth from the extraction of non-renewable resources. The overall goal includes a reduction of the material footprint by 50% by 2030, to be achieved through a range of prescribed targets:

Circular use rate of all materials 25% by 2030 (2021: 11.7%).

Municipal waste recycling 65% by 2035 (2021: 49.6%).

Extended producer responsibility schemes introduced across a range of product categories.

Exhibit 4: European recycling target deadlines

31 December 2008

31 December 2025

31 December 2030

All packaging waste

55–80%

65%

70%

Glass

60%

70%

75%

Paper & cardboard

60%

75%

85%

Metals

50%

70% ferrous

50% aluminium

80% ferrous

60% aluminium

Wood

15%

25%

30%

Plastic

23%

50%

55%

Source: EU Packaging and Packaging Waste Directive

This overarching European programme framework is translated to national targets and legislation. Key for Renewi are:

The Netherlands. The goal is for the Dutch economy to be completely circular by 2050 with a short-term target of halving of the consumption of primary raw materials by 2030.

Belgium. In Belgium the three regions have similar targets highlighted by Flanders. The Flemish government aims to decouple the material footprint from economic growth, reduce virgin material consumption by 30% by 2030 and increase recycling rates across a range of materials including collection and recycling of at least 95% of household packaging by 2025.

It is worth noting that Belgium and the Netherlands are already leaders in waste management and recycling in Europe. This not only ensures a more positive backdrop for Renewi but enables the company to develop processes that may be transferable to other regions.

Exhibit 5: Municipal waste recycling rates 2021 (%)

Exhibit 6: Circularity material use rate 2021 (%)

Source: Eurostat

Source: Eurostat

Exhibit 5: Municipal waste recycling rates 2021 (%)

Source: Eurostat

Exhibit 6: Circularity material use rate 2021 (%)

Source: Eurostat

Corporate agenda

Companies are looking to improve their sustainability credentials for numerous reasons, including marketing purposes as consumers become ever more environmentally conscious. This is leading many companies to set targets for use of recycled materials, which in turn is progressing the market for recyclates. For instance:

Unilever – at least 25% recycled content in its packaging by 2025.

Nestlé – 100% recyclable or reusable packaging by 2025 and reduce use of virgin plastic by one-third.

Danone – 25% of recycled material on average in plastic packaging and 50% on average for water and beverage bottles by 2025.

L’Oréal – all plastics in packaging recycled or bio-based by 2030 (50% by 2025).

Johnson & Johnson Consumer Health – the brands will use 100% recyclable, reusable or compostable plastic packaging by 2025.

Coca-Cola – will source 50% of plastic bottles from recycled content by 2025.

Ahold – 25% of total own brand primary plastic packaging weight made from post-consumer recycled content by 2025.

Renewi’s position

Renewi refers to itself as a ‘waste-to-product company’ as it looks to align its strategy with the advancing circular economy. Management has set a target to achieve a recycling rate of 75% (FY23: 63.6%). Note, this target has been retained despite a redefining of the calculation which reduced the reported recycling rate by c 6%, see Exhibit 7. This commitment is given further emphasis in management’s latest long-term incentive plan, which contains targets for recycling with a 25% overall weighting.

Exhibit 7: Renewi recycling rates (%)

Source: Renewi

Recent strategic progress

Management has made good progress in improving the performance of the group in recent years. FY20 and FY21 demonstrated the resilience of the business through COVID-19 while the exceptional rebound in FY22 was helped by particularly strong recyclate prices, which eased in FY23. Taking these volatilities into account, Exhibits 8 and 9 demonstrate the underlying progress achieved.

Exhibit 8: Operational performance

Exhibit 9: Underlying EPS (c)

Source: Renewi

Source: Renewi

Exhibit 8: Operational performance

Source: Renewi

Exhibit 9: Underlying EPS (c)

Source: Renewi

A key strand to improving the group’s performance came in 2020 when management set out three strategic initiatives to increase EBIT by €60m (€20m per initiative).

Renewi 2.0

Renewi 2.0 is a three-year programme to bring about simplification of the group structure, increase customer focus, improve efficiency and raise employee satisfaction. In particular, this involved:

Digitisation to drive down costs and improve customer experience/services.

Simplification of processes. Remove complexity, improve customer experience and increase accountability.

The programme is now largely complete at a cost of €28m, significantly below the original €40m budget, with the full €20m benefits being achieved (FY23 benefits estimated at €17.8m). Given the progress made, we believe there could be further upside potential, particularly from the digitisation transformation.

Investments

Management announced a range of new investment projects in 2020 with the aim of achieving c €20m of additional EBIT from an investment of over €100m.

Exhibit 10: Project summary

Project 

Investment 

Partner 

Expected EBIT

Latest progress

Advanced residual waste sorting 

€60m 

Stand-alone 

€€€€€ 

Three lines approved. Two out of three progressing in line with expectations. Ghent: production started January 2023 and operating as expected; Puurs: civil works started, on track and new baling area ready and in production; Limburg site: new site acquisition delayed due to permitting process

Transition biogas from electricity to bio-LNG

    

SHELL 

€€ 

Installation completed and operating as expected

Polyurethane recycling 

 €10m 

Chemical recycler 

€ – €€€ 

Technical and commercial feasibility studies ongoing

Expansion of plastic recycling 

Stand-alone 

N/A 

Ghent and Waalwijk investments complete, Acht progress on track: civil works completed and construction of technical equipment progressing well. Commissioning beginning Q2 as planned

Expansion of mattress recycling 

<€5m 

IKEA 

€€€ 

Investment of chemical recycling of polyurethane foam facility in Lelystad. First international expansion completed with the integration of TFR Group in the UK

Upgraded wood flake supply for low-carbon steel 

N/A 

Arcelor-
Mittal 

€€ – €€€€ 

Project stopped for commercial reasons

Cellulose from diapers and incontinence products 

N/A 

FMCG major 

€ – €€€ 

Returned to development stage

Source: Renewi, Edison Investment Research. Note: € equates approximately to €2m of EBIT.

The key investment has been in advanced recycling in Flanders, by far the most significant project at a cost of c €60m. Belgium is a federal state split into three regions: Flanders, Wallonia and Brussels. OVAM is the Public Waste Agency of Flanders, responsible for the preparation and implement of policies on sustainable material management. Companies are required to report their waste, which is then monitored by OVAM. In January 2023 additional legislation, Vlarema 8, came into force. This requires companies to increase the level of waste sorting and recycling, with up to 24 different waste streams required to be identified. Waste that is not sorted in line with the new legislation is subject to a €50 a tonne charge.

As the largest industrial waste company in Flanders, with around a third of the market and therefore having strong links to customers, Renewi is well positioned to benefit from this legislation. The company is building three advanced lines at Ghent, Puurs and Limberg in Flanders, with the Ghent facility now fully operational. These facilities will have a capacity of c 400kt, capable of generating c 130kt of recyclates and promoting residual recycling rates from 18.8% to 56.9%.

Income will come from three sources: additional gate fees, expected to reflect the cost of the alternative charges under the new legislation; sales of recyclates generated; and reduced incineration fees from the reduced waste. The first commercial benefits of this investment should be seen in FY24.

ATM

ATM is based at the Moerdijk port and industrial complex in the Netherlands and provides contamination processing services to commercial customers. Materials treated include soil, tar asphalt granulate (TAG), wastewater and oily sludge, as well as disposal of hazardous waste including chemical waste.

Soil and TAG are treated in a thermal remediation facility to burn off and collect/filter contaminates to produce ‘neutralised’ thermally treated soil (TGG), which can then be reused. In 2018 concerns were raised over the quality of remediated soil by IL&T, an independent Dutch regulator, leading to the Dutch government halting the use of TGG. This moratorium inevitably pushed the business into loss.

In response a recovery strategy was developed based primarily on additional processing of the treated soil into secondary materials for the construction industry. These are sand (55%), gravel (30%) and filler (15%) to be used in the production of cement, concrete and asphalt. The investment was planned to increase capacity to over 1.5Mtpa. In addition, the plan included disposing of the 1.5Mt legacy stocks of TGG, requiring legal authorisation per individual use.

Exhibit 11: Original recovery plan – volumes

Exhibit 12: Original recovery plan – financial

Source: Renewi

Source: Renewi

Exhibit 11: Original recovery plan – volumes

Source: Renewi

Exhibit 12: Original recovery plan – financial

Source: Renewi

A combination of COVID-19 and additional legislation, both on the existing stockpile of TGG and in gaining certification for the upgraded new products, has delayed the project with full recovery now expected in FY26. According to the latest update:

Legacy TGG stocks at end-FY23 stood at 600kt, little changed on the previous year but significantly below the peak 1,500kt at the end of FY20. The company has 130kt of new contracts in place and a further 300kt in finalisation, suggesting significant progress should be achievable ahead of the FY26 target date.

Advanced material production is scaling although further certification work is required. Multiple partners are trialling the outputs with potential for 1Mtpa of sand, although it is worth noting that the backdrop for the construction sector in the Netherlands is less positive at present.

Financial impact

There have inevitably been shifts in the three programmes, which have also been affected by COVID-19 and changing regulations. These have delayed the full benefit until FY26 although management guidance remains for an additional €60m of EBIT. Our view is that the ATM recovery is likely to prove the most challenging timeframe, but that Renewi 2.0 offers additional potential that could offset this. Exhibit 13 sets out our forecast financial impact, which would provide for 28% benefit to FY23 underlying operating profit by FY26. These numbers are incorporated in our forecasts, albeit we anticipate lower recyclate prices and softer economic conditions in key markets to weigh on progress in the current financial year.

Exhibit 13: Impact on operating profit (€m)

FY23

FY24

FY25

FY26

Renewi 2.0

18

20

20

20

Innovations

5

10

15

20

M&W Recovery

0

0

10

20

Total

23

30

45

60

Upside to FY23 underlying EBIT

5%

17%

28%

Source: Renewi, Edison Investment Research

Risks and sensitivities

The group is exposed to the normal economic cycle including activity levels, energy pricing and wage inflation, particularly in the key Netherlands and Belgium territories. We see two significant company-specific issues that investors should consider: recyclate pricing and the UK municipal waste contracts.

Recyclates

The group treats 11Mt of waste generating 7Mt of recyclates. The majority is exposed to stable pricing (eg minerals, glass and treated water), but around 1Mt is exposed to metals, paper, wood and plastics where pricing is more dynamic. The company uses pass through pricing for c 65% of these more volatile commodities to reduce the impact. However, the remainder is unhedged and therefore exposed to such variances. Assuming 350kt and an average recyclate price of €150 a tonne suggests over €50m of exposure. This may not seem overly significant for a group with revenues of more than €1.8bn but the lack of any offset means that the fluctuations flow straight through to the P&L. While there are many other moving parts, Exhibit 14 highlights at the very least the direction in movement between the recyclate (outbound) revenue and operating profit for the key Commercial Division.

Exhibit 14: Commercial Division – recyclate (outbound) sales versus divisional EBIT

Source: Renewi

UK municipal contracts

Renewi has a portfolio of long-term contracts to operate waste treatment facilities for UK councils, as highlighted in Exhibit 15.

Exhibit 15: PFI portfolio

Contract

Financial close

Full service commitment

Contract expiry

Interests in special purpose vehicle

Argyll & Bute

September 2001

April 2003

September 2026

100%

Cumbria

June 2009

April 2013

June 2034

100%

Wakefield

January 2013

December 2015

February 2038

50.001%

Barnsley, Doncaster and Rotherham

March 2012

July 2015

June 2040

100%

East London Waste Authority

December 2002

August 2007

December 2027

20%

Source: Renewi

The performance of the private finance initiative (PFI) contracts has been disappointing, requiring significant increases in provisioning and continued cash spend. Note that changes to IFRS accounting for long-term contracts increased the provisions by €53.2m in April 2022.

Exhibit 16: UK municipals provision and cash flows

Source: Renewi

There are reasons for optimism with two of the contracts due to expire in the medium term: Argyll & Bute in September 2026 and East London Waste Authority in December 2027. We also note that the timing of provisions from the accounts, as shown in Exhibit 17, suggest a more modest financial cost from the medium term. There also remains the potential to renegotiate individual contracts. The UK government is targeting 65% recycling of municipal waste by 2035, up from 44.6% in 2021, which, depending on legislation, may provide a catalyst.

Exhibit 17: Onerous Contract Provisions (predominantly the UK municipals contracts)

€m

Within 1 year

18.9

Between 1 and 5 years

62.3

Between 6 and 10 years

32.8

Over 10 years

27.9

Within 1 year

Between 1 and 5 years

Between 6 and 10 years

Over 10 years

€m

18.9

62.3

32.8

27.9

Source: Renewi


Valuation

Our valuation uses an underlying discounted cash flow (DCF), a quoted peer group comparison and a read-across from recent corporate activity.

Discounted cash flow

Exhibit 18 provides a DCF valuation relative to the weighted cost of capital (WACC) and longer-term growth rates, two key variables. To provide a conservative approach, the valuation includes the provisions for the UK municipals and site restoration and aftercare as well as all finance leases. It excludes the UK PFI debt, which is non-recourse to Renewi (currently €69m or 75p a share). Our cash flow forecasts include €10m of ongoing exceptional spend a year for potential restructuring programmes, additional pension contributions (currently €3m a year), etc. Note this is a change in methodology from our previous valuation where provisions were assumed within the annual cash flows. Given the limited guidance from management as to the timing etc, we see using the balance sheet figures as a more conservative approach, albeit it has reduced our valuation from 926p.

Exhibit 18: DCF valuation per share (p)

Terminal growth rate

WACC

1.0%

2.0%

3.0%

4.0%

12.0%

358

405

462

533

11.5%

417

471

537

621

11.0%

482

544

622

723

10.5%

554

626

719

839

10.0%

634

719

829

976

9.5%

724

825

957

1,137

9.0%

825

946

1,106

1,331

8.5%

941

1,086

1,283

1,569

8.0%

1,074

1,250

1,496

1,866

Source: Edison Investment Research

Our current calculation for the group’s WACC is 9.5%. Assuming a conservative terminal growth rate of 2%, this suggests a valuation of 825p a share.

Peer group valuation

The following is based on European peer group valuations, reflecting both the locus of Renewi’s earnings and the lack of UK-listed comparable companies.

Exhibit 19: Peer valuations

Market cap

EV/EBIT (x)

EV/EBITDA (x)

P/E (x)

£m

2023

2024

2023

2024

2023

2024

Befessa

1,060

12.8

10.0

8.2

6.8

16.0

11.6

Cabka

146

27.9

14.7

8.0

6.1

31.4

18.3

Groupe Pizzono

194

16.3

16.7

4.7

4.6

19.4

18.5

Lassila & Tikanoja

316

13.5

11.6

5.6

5.3

12.5

11.0

Mo-Bruk

186

7.7

7.1

7.5

6.9

10.3

9.6

Seche

808

14.0

12.9

6.5

6.0

17.5

16.2

Veolia

16,543

8.9

8.1

4.3

4.1

15.0

12.5

Average

14.4

11.6

6.4

5.7

17.4

14.0

Median

13.5

11.6

6.5

6.0

16.0

12.5

Source: Refinitiv, 22 August 2023

Our valuation includes the provisions for the UK municipals and site restoration and aftercare as well as all finance leases and excludes PFI debt, in line with our DCF calculation. The pension has been included as €30m of debt. This is higher than the €9.3m balance sheet figure but arguably more representative of the annual €3m cash payments agreed with the trustees. Renewi forecasts have been calendarised.

Exhibit 20: Peer group-based valuation

EV/EBIT

EV/EBITDA

P/E

2023

2024

2023

2024

2023

2024

Peer group average rating (x)

13.5

11.6

6.5

6.0

16.0

12.5

Renewi forecast EBIT/EBITDA/EPS (€m/€c)

130

143

255

270

83

89

Valuation (€m)

1,759

1,654

1,660

1,619

Provisions (€m)

(306)

(306)

(306)

(306)

Net core debt (€m)

(429)

(441)

(429)

(441)

Finance leases (€m)

(255)

(255)

(255)

(255)

Pension deficit (€m)

(30)

(30)

(30)

(30)

Equity valuation (€m)

739

622

641

587

Number of shares (m)

80.5

80.7

80.5

80.7

Value per share (€c)

919

771

796

727

1,333

1,113

Exchange rate (€/£)

1.15

1.15

1.15

1.15

1.15

1.15

Value per share (p)

799

670

692

633

1,159

968

Source: Edison Investment Research

Note there is a clear discrepancy between the EV/EBIT and EV/EBITDA valuations averaging 661p and the P/E based valuation averaging 1,064p. This largely reflects the provisions on the balance sheet, which are excluded from underlying earnings but account for 330p a share. Adjusting for these provides an overall average valuation of 724p a share.

Corporate activity-based valuation

There has been significant corporate activity in the waste and recycling sector in recent years with particular interest from private equity.

Exhibit 21: Sector deals

Date

Company

Acquirer

Deal value (m)

EV/EBITDA

EV/EBIT

Jul-17

O'Brien

Biffa

UK industrial & commercial collections

£

35

5.3

6.6

Aug-17

MWR

EMR

Metal & waste recycling

£

53

7.5

12

Aug-18

Weir Waste

Biffa

UK industrial & commercial collections

£

16

7.4

14.7

Jun-19

Renewi Canada

Convent Capital

Renewi Canadian operations

72

15.7

48.0

Oct-19

Advanced Disposal

Waste Management Inc

US domestic and industrial waste

$

4,600

13.0

29.1

Mar-20

Viridor

KKR

UK waste, recycling, waste to energy

£

4,200

18.6

29.3

Oct-20

Simply Waste

Biffa

UK industrial & commercial collections

£

35

6.7

11.3

Oct-20

SUEZ Sweden

Veolia

Waste & treatment

24,200

8.8

19.0

Nov-20

SUEZ Sweden

PreZero

Plastics and hazardous waste in D, NL, POL

357

10.5

Jan-21

Spill Tech (South Africa)

Seche

Hazardous spills

70

8.9

Apr-21

Suez (NL, Germany)

PreZero

Recovery/recycling in NL, LUX, D, POL

1,100

11.0

May-21

Viridor Collections

Biffa

UK industrial & commercial collections

£

126

7.0

Sep-21

Augean

Eleia

Hazardous waste and North Sea

£

396

13.7

19.3

Apr-22

Filta

Franchise Brands

Cooking oil recycling

£

46

14.3

30.4

Jun-22

Biffa

Energy Capital Partners

Waste management

£

1,663

8.5

17.1

Aug-22

Suez UK

Suez SA

Waste management

2,400

16.9

Jul-23

Attero

Ardian Infrastructure

NL waste management/waste to energy

1,500

10.8

Median

 

 

 

 

 

10.5

19.0

Source: Edison Investment Research

Our implied valuation uses the same assumptions and methodology as for the above peer valuation. To provide an undisturbed share price we have assumed a take-out premium of 35%, in line with the recent deals in the UK market: Augean (50%), Filta (30%) and Biffa (28%).

Exhibit 22: Take-out implied valuation

EV/EBIT

EV/EBITDA

Rating (x)

19.0

10.5

Renewi forecast FY24 (€m)

129

255

Valuation (€m)

2,457

2,677

Provisions (€m)

(306)

(306)

Net core debt (€m)

(429)

(429)

Finance leases (€m)

(255)

(255)

Pension deficit (€m)

(30)

(30)

Equity valuation (€m)

1,437

1,657

Number of shares (m)

80.5

80.5

Value per share (€c)

1,785

2,058

Exchange rate (€/£)

1.15

1.15

Value per share (p)

1,552

1,790

Assumed take-out premium

35%

35%

Implied undisturbed price (p)

1,150

1,326

Source: Edison Investment Research

Overall valuation

Exhibit 23 provides a summary of our valuation from the three methodologies. We note the high valuation from the corporate activity, even taking into account a premium for control, highlighting the potential. However, our preferred on-market valuation is an average of the DCF and listed peer ratings, providing a figure of 726p a share.

Exhibit 23: Value per share (p)

Average

DCF

825

Peer valuation

724

Take-out valuation

1,238

DCF

Peer valuation

Take-out valuation

Average

825

724

1,238

Source: Edison Investment Research

Exhibit 24: Financial summary

2021

2022

2023

2024e

2025e

Year to March (€m)

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

 

 

1,693.6

1,869.2

1,892.3

1,924.9

2,007.1

Cost of Sales

(1,408.5)

(1,512.5)

(1,538.4)

(1,563.0)

(1,625.7)

Gross Profit

285.1

356.7

353.9

361.9

381.3

EBITDA

 

 

 

 

202.2

261.5

257.0

254.9

274.8

Underlying operating profit

 

 

 

 

73.0

133.6

132.9

129.4

146.9

Amortisation of acquired intangibles

(3.3)

(3.4)

(5.0)

(5.5)

(6.0)

Exceptionals

(33.6)

(6.2)

(5.6)

(5.0)

0.0

Reported operating profit

36.1

124.0

122.3

118.9

140.9

Net Interest

(26.8)

(28.8)

(29.2)

(37.1)

(42.9)

Joint ventures & associates (post tax)

1.6

0.5

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

 

 

47.8

105.3

103.7

92.4

104.0

Profit Before Tax (reported)

 

 

 

 

10.9

95.7

93.1

81.9

98.0

Reported tax

(5.4)

(20.3)

(26.5)

(20.5)

(24.5)

Profit After Tax (norm)

35.8

78.8

75.6

67.9

77.0

Profit After Tax (reported)

5.5

75.4

66.6

61.4

73.5

Minority interests

(0.1)

(0.9)

(3.7)

(2.5)

(3.0)

Net income (normalised)

35.7

77.9

71.9

65.4

74.0

Net income (reported)

5.4

74.5

62.9

58.9

70.5

Av. Shares outstanding (m)

79.5

79.7

80.3

80.5

80.7

EPS - normalised (c)

 

 

 

 

45

98

90

81

92

EPS - normalised fully diluted (c)

 

 

 

 

45

98

89

81

91

EPS - basic reported (c)

 

 

 

 

7

93

78

73

87

Dividend (c)

0.0

0.0

0.0

5.0

10.0

Revenue growth (%)

0.0

10.4

1.2

1.7

4.3

Gross Margin (%)

16.8

19.1

18.7

18.8

19.0

EBITDA Margin (%)

11.9

14.0

13.6

13.2

13.7

Normalised Operating Margin (%)

4.3

7.1

7.0

6.7

7.3

BALANCE SHEET

Fixed Assets

 

 

 

 

1,612.3

1,565.9

1,686.2

1,730.7

1,767.9

Intangible Assets

594.9

592.8

636.3

630.8

625.3

Tangible and Right-of-use Assets

794.5

767.4

871.0

921.0

963.7

Investments & other

222.9

205.7

178.9

178.9

178.9

Current Assets

 

 

 

 

355.7

385.9

399.3

403.6

423.6

Stocks

20.6

22.5

25.2

27.2

28.4

Debtors

247.7

269.3

289.6

294.6

313.5

Cash & cash equivalents

68.8

63.6

62.7

60.0

60.0

Other

18.6

30.5

21.8

21.8

21.8

Current Liabilities

 

 

 

 

(646.7)

(732.7)

(665.4)

(695.6)

(713.3)

Creditors

(546.2)

(528.4)

(521.8)

(518.8)

(536.5)

Tax and social security

(13.8)

(24.2)

(31.2)

(31.2)

(31.2)

Short term borrowings

(47.8)

(148.9)

(66.8)

(100.0)

(100.0)

Other

(38.9)

(31.2)

(45.6)

(45.6)

(45.6)

Long Term Liabilities

 

 

 

 

(1,083.7)

(880.9)

(1,072.8)

(1,039.1)

(1,011.2)

Long term borrowings

(689.1)

(518.7)

(681.6)

(712.9)

(725.0)

Other long term liabilities

(394.6)

(362.2)

(391.2)

(326.2)

(286.2)

Net Assets

 

 

 

 

237.6

338.2

347.3

399.6

467.0

Minority interests

(6.1)

(7.0)

(10.1)

(10.1)

(10.1)

Shareholders' equity

 

 

 

 

231.5

331.2

337.2

389.5

456.9

CASH FLOW

Operating Cash Flow

202.2

261.5

257.0

254.9

274.8

Working capital

82.4

(59.9)

(23.8)

(10.0)

(2.3)

Exceptional & other

(31.1)

(17.1)

(23.6)

(71.0)

(41.0)

Tax

(14.8)

(7.6)

(21.2)

(24.5)

(27.1)

Net operating cash flow

 

 

 

 

238.7

176.9

188.4

149.4

204.4

Capex

(57.6)

(77.3)

(118.1)

(125.0)

(120.0)

Acquisitions/disposals

(2.7)

(3.2)

(60.7)

0.0

0.0

Net interest

(15.9)

(17.2)

(21.3)

(37.7)

(43.5)

Equity financing

(1.2)

(1.6)

(4.7)

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

(8.0)

Net Cash Flow

161.3

77.6

(16.4)

(13.2)

32.9

Opening net debt/(cash)

 

 

 

 

(456.9)

(343.7)

(303.1)

(370.7)

(428.9)

FX

(6.4)

7.6

(0.2)

0.0

0.0

Other non-cash movements

(41.7)

(44.6)

(51.0)

(45.0)

(45.0)

Closing net debt/(cash)

 

 

 

 

(343.7)

(303.1)

(370.7)

(428.9)

(441.0)

Finance Leases (FRS 16)

(236.7)

(221.9)

(254.8)

(254.8)

(254.8)

PPP non-recourse

(87.6)

(79.1)

(69.3)

(69.3)

(69.3)

Closing net debt/(cash)

 

 

 

 

(668.0)

(604.1)

(694.8)

(753.0)

(765.1)

Source: Renewi, Edison Investment Research

General disclaimer and copyright

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 £60,000 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 research department of Edison 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

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 £60,000 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 research department of Edison 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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