Renewi — Decisive steps in UK Municipal

Renewi (LSE: RWI)

Last close As at 24/02/2024

GBP5.79

3.00 (0.52%)

Market capitalisation

GBP467m

More on this equity

Research: Industrials

Renewi — Decisive steps in UK Municipal

A review of onerous UK Municipal contracts (flagged on 12 February) has quantified net exceptional costs totalling £73m (including c £49m for three long-term ongoing PFI operating contracts, the remainder for exiting two other operations). There is no change to our headline estimates or any material impact on group net debt or annual cash flows as a result. These actions will allow investors to re-focus on the important merger integration programme, now entering its second year and continuing on track. By the time this completes in FY20, Renewi’s P/E rating will have reduced to 11.0x at the current share price.

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Industrials

Renewi

Decisive steps in UK Municipal

Divisional update

Industrial support services

9 March 2018

Price

89.4p

Market cap

£715m

€1.13/£

Net debt (£m) at September 2017
Core group net debt (ex PPP/PFI finance)

436

Shares in issue

799.8m

Free float

99.5%

Code

RWI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.9)

(10.2)

(5.9)

Rel (local)

(7.8)

(8.4)

(5.6)

52-week high/low

108.2p

80.0p

Business description

Renewi is a waste-to-product company with operations primarily in the UK, the Netherlands and Belgium. Its activities span the collection, processing and resale of industrial, hazardous and municipal waste.

Next events

FY18 year-end trading update

4 April

FY18 results

May tbc

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Renewi is a research client of Edison Investment Research Limited

A review of onerous UK Municipal contracts (flagged on 12 February) has quantified net exceptional costs totalling £73m (including c £49m for three long-term ongoing PFI operating contracts, the remainder for exiting two other operations). There is no change to our headline estimates or any material impact on group net debt or annual cash flows as a result. These actions will allow investors to re-focus on the important merger integration programme, now entering its second year and continuing on track. By the time this completes in FY20, Renewi’s P/E rating will have reduced to 11.0x at the current share price.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/16

614.8

21.6

4.3

3.1

20.8

3.4

03/17

779.2

26.0

3.7

3.1

24.2

3.4

03/18e

1,531.4

51.0

4.8

3.1

18.5

3.4

03/19e

1,547.3

70.6

6.6

3.1

13.5

3.4

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

Taking a prudent view on longer-term contracts

The larger exceptional charge portion relates to longer duration contracts. In effect, future profit expectations have reduced and long-term contract accounting requires the full life impact to be recognised and discounted back. The resulting onerous contract provisions for Wakefield (to 2038) and Barnsley, Doncaster and Rotherham (BDR, 2040) equates to £30m and £27m respectively. If one assumed these changes were evenly spread over the remaining term, this would equate to an annual provision release of £2.5-3.0m, though we would expect it to be larger in earlier years, tapering down towards the end point. These revised expectations have been driven by operational experience at the facilities (both now into their third year of operation) and changes with regard to market offtake conditions and certain subsidies. Separately, a £3m favourable contractor settlement at Wakefield and a £5m provision release relating to Cumbria (2034) from improved operational performance together represent credits that partly offset the larger charges.

Exiting other smaller Municipal contracts

Renewi has also removed potential future uncertainties regarding two further operations by taking the decision to exit them in FY19. A smaller onerous contract charge for the Dumfries and Galloway PFI operating contract (2029, £9m) and pre-exit provisions and non-cash asset write-downs (both of £8m) for the Westcott Park anaerobic digestion facility will also be included in FY18 exceptionals.

Valuation: P/E multiple approaching 11x

Headline estimates are unchanged overall as UK Municipal run rates now converge with our model. On this basis, Renewi’s closing year P/E and EV/EBITDA (adjusted for pensions cash) multiples are 18.5x and 7.6x, respectively. By FY20, as the Shanks/VGG merger process completes, these metrics reduce to 11.0x and 6.0x respectively at the current share price. UK Municipal has been something of a distraction to investors but should be less so following the announced actions and the merger integration progress should come more to the fore.

Exhibit 1: Financial summary

£'ms

2011

2012

2013

2014

2015

2016

2017

2018e

2019e

2020e

March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

717.3

750.1

614.6

633.4

601.4

614.8

779.2

1,531.4

1,547.3

1,576.4

Cost of Sales

 

 

(601.9)

(622.9)

(511.6)

(528.3)

(506.1)

(517.8)

(653.3)

(1,263.4)

(1,276.5)

(1,300.5)

Gross Profit

 

 

115.4

127.2

103.0

105.1

95.3

97.0

125.9

268.0

270.8

275.9

EBITDA

 

 

100.0

105.0

88.4

88.5

72.6

69.2

81.6

161.2

186.3

201.3

Operating Profit (before GW and except.)

49.7

53.4

44.9

45.6

34.3

33.4

36.5

71.4

95.5

109.5

Net Interest

 

 

(14.2)

(10.8)

(10.8)

(12.6)

(11.4)

(11.2)

(10.3)

(19.9)

(23.0)

(21.0)

Other Finance

 

 

(0.3)

(6.4)

(3.9)

(2.9)

(1.5)

(1.6)

(2.2)

(2.6)

(4.1)

(4.1)

JV/Associates

 

 

0.0

0.1

0.3

0.3

0.8

1.0

2.0

2.1

2.2

2.3

Intangible Amortisation

 

 

(3.9)

(3.7)

(2.5)

(2.3)

(1.9)

(1.8)

(2.1)

(5.8)

(5.8)

(5.8)

Non Trading & Exceptional Items

 

 

(10.1)

(2.7)

(38.1)

(20.5)

(40.8)

(22.3)

(85.3)

(103.0)

(25.9)

(9.9)

Profit Before Tax (norm)

 

 

35.2

36.3

30.5

30.4

22.2

21.6

26.0

51.0

70.6

86.7

Profit Before Tax (FRS 3)

 

 

21.2

29.9

(10.1)

7.6

(20.5)

(2.5)

(61.4)

(57.8)

38.9

71.0

Tax - headine

 

 

0.7

(4.2)

(1.1)

(5.8)

2.3

(1.5)

0.5

(11.0)

(17.7)

(21.7)

Profit After Tax (norm)

 

 

25.9

26.6

22.8

23.2

20.5

19.3

20.1

38.3

53.0

65.0

Profit After Tax (FRS 3)

 

 

21.9

25.7

(11.2)

1.8

(18.2)

(4.0)

(60.9)

(68.7)

21.3

49.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

448.0

448.0

448.3

448.9

449.1

449.5

536.3

799.8

799.8

799.8

EPS - normalised (p)

 

 

5.8

5.9

5.1

5.1

4.5

4.3

3.7

4.8

6.6

8.1

EPS - FRS 3 (p)

 

 

4.9

5.7

(7.9)

(6.3)

(3.8)

(0.9)

(11.4)

(8.6)

2.6

6.1

Dividend per share (p)

 

 

2.88

3.05

3.05

3.05

3.05

3.05

3.05

3.05

3.05

3.45

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

16.1

17.0

16.8

16.6

15.9

15.8

16.2

17.5

17.5

17.5

EBITDA Margin (%)

 

 

13.9

14.0

14.4

14.0

12.1

11.3

10.5

10.5

12.0

12.8

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

6.9

7.1

7.3

7.2

5.7

5.4

4.7

4.7

6.2

6.9

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

767.9

751.6

772.1

744.4

737.3

670.4

1,420.9

1,448.8

1,441.7

1,435.0

Intangible Assets

 

 

289.6

271.4

251.8

211.1

173.8

194.5

603.3

576.6

571.0

560.4

Tangible Assets

 

 

397.5

390.9

375.3

322.7

282.9

297.0

587.4

639.2

637.7

641.6

Investments

 

 

80.8

89.3

145.0

210.6

280.6

178.9

230.2

233.0

233.0

233.0

Current Assets

 

 

244.1

233.6

247.3

265.1

224.0

177.0

348.2

362.1

366.4

370.6

Stocks

 

 

9.9

10.5

11.0

9.4

6.9

6.8

19.9

18.7

18.3

18.5

Debtors

 

 

179.7

163.3

160.9

151.5

156.3

135.5

253.4

270.4

275.2

279.1

Cash

 

 

54.5

59.8

75.4

104.2

60.8

34.7

74.9

73.0

73.0

73.0

Current Liabilities

 

 

(276.4)

(238.7)

(248.9)

(229.6)

(277.4)

(227.2)

(483.2)

(465.3)

(470.7)

(447.4)

Creditors

 

 

(237.1)

(226.5)

(230.7)

(226.3)

(202.4)

(224.8)

(466.8)

(452.0)

(454.1)

(456.4)

Short term borrowings

 

 

(39.3)

(12.2)

(18.2)

(3.3)

(75.0)

(2.4)

(16.4)

(13.3)

(16.6)

9.0

Long Term Liabilities

 

 

(338.2)

(375.9)

(444.2)

(504.7)

(432.5)

(434.2)

(845.7)

(984.4)

(979.3)

(975.1)

Long term borrowings

 

 

(222.6)

(253.8)

(234.5)

(253.8)

(140.8)

(224.9)

(482.4)

(551.1)

(551.1)

(551.1)

Other long term liabilities

 

 

(115.6)

(122.1)

(209.7)

(250.9)

(291.7)

(209.3)

(363.3)

(433.3)

(428.2)

(424.0)

Net Assets

 

 

397.4

370.6

326.3

275.2

251.4

186.0

440.2

361.2

358.1

383.0

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

99.4

109.9

67.7

78.6

55.8

72.2

27.9

102.1

149.2

181.6

Net Interest

 

 

(9.3)

(13.4)

(11.5)

(13.2)

(12.8)

(12.8)

(19.0)

(24.0)

(23.0)

(21.0)

Tax

 

 

(4.1)

(7.1)

1.9

(1.6)

(5.7)

(4.8)

(5.3)

(9.0)

(15.7)

(19.7)

Net Capex

 

 

(67.3)

(74.8)

(50.1)

(27.1)

(37.2)

(25.8)

(41.2)

(99.0)

(89.5)

(90.9)

Acquisitions/disposals

 

 

2.5

(19.6)

(59.2)

(54.1)

(67.3)

18.2

39.5

0.0

0.0

0.0

Equity Financing

 

 

0.1

0.0

0.4

0.2

0.1

0.3

136.5

0.1

0.0

0.0

Dividends

 

 

(11.9)

(13.3)

(13.7)

(13.7)

(13.7)

(13.7)

(15.1)

(24.4)

(24.4)

(24.4)

Net Cash Flow

 

 

9.4

(18.3)

(64.5)

(30.9)

(80.8)

33.6

123.3

(54.1)

(3.3)

25.6

Opening core net debt/(cash)

 

 

319.7

207.4

206.2

177.3

152.9

155.0

192.6

423.9

491.4

494.7

HP finance leases initiated

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

 

 

102.9

19.5

93.4

55.3

78.7

(71.2)

(354.6)

(13.4)

(0.0)

(0.0)

Closing core net debt/(cash)

 

 

207.4

206.2

177.3

152.9

155.0

192.6

423.9

491.4

494.7

469.1

Closing PPP/PFI non-recourse net debt

 

0.0

52.0

100.1

151.2

222.6

91.1

87.1

84.8

84.8

84.8

Source: Company, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Renewi and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Renewi and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: TMT

Artec technologies — Contract wins provide excellent references

artec has won three prestigious new contracts in recent months that provide a strong endorsement of the company’s new platform. The wins come in the wake of the 2016/17 period, which the company used to focus on modernising its software platform. artec has subsequently undertaken a 10% capital increase that will provide working capital to help it deliver the new contracts. During the upcoming FY17 results release in April, management intends to reveal a new business plan, which will outline how it intends to address the range of market opportunities.

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