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Research: Industrials
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.
Written by
Renewi |
Decisive steps in UK Municipal |
Divisional update |
Industrial support services |
9 March 2018 |
Share price performance
Business description
Next events
Analyst
Renewi is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
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Research: TMT
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.