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Research: Industrials
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%.
Written by
Renewi |
ATM prudence and debt management actions |
Year-end update |
Industrial support services |
1 May 2019 |
Share price performance
Business description
Next event
Analyst
Renewi is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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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Research: Consumer
In keeping with its strong record of asset development, PPHE is actively repositioning itself at the corporate level. The introduction of EPRA reporting highlights the company’s success from a property perspective (EPRA NAV per share of £24.57 at December 2018), while share liquidity and broadening of the investor base should benefit from the recent secondary placing and move to a Premium Listing. Operationally, progress is robust with resilient trading (8% gain in Q1 like-for-like RevPAR and revenue), continued material investment payoff and abundant asset-acquisition opportunities. We believe PPHE’s shares offer an attractive way to access hotel property markets, particularly in London and the Netherlands, both in terms of capitalisation yield and a SOTP valuation.