Renewi — Resilient platform to accelerate growth

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 — Resilient platform to accelerate growth

Increasing European legislation for recycling and recycled content provides a positive backdrop for Renewi as a waste treatment company (63.6% of waste treated was recycled in FY23). Stable FY23 results in a more challenging economic environment offer a solid platform for the management to deliver on its new target to grow sales (and profit given the margin expectations) by c 50% over the next five years.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Renewi

Resilient platform to accelerate growth

Full year results

Industrial support services

30 May 2023

Price

540p

Market cap

£442m

€1.15/£

Net debt pre-PPPs and leases at 31 March 2023

€371m

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

10.5

(22.1)

(21.4)

Rel (local)

(4.0)

(18.6)

(21.2)

52-week high/low

851.0p

489.0p

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

AGM

13 July

Half year results

9 November

Analyst

David Larkam

+44 (0)20 3077 5700

Renewi is a research client of Edison Investment Research Limited

Increasing European legislation for recycling and recycled content provides a positive backdrop for Renewi as a waste treatment company (63.6% of waste treated was recycled in FY23). Stable FY23 results in a more challenging economic environment offer a solid platform for the management to deliver on its new target to grow sales (and profit given the margin expectations) by c 50% over the next five years.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/22

1,869

105.3

98

0

6.3

N/A

03/23

1,892

103.7

90

0

6.9

N/A

03/24e

1,925

92.4

81

5

7.6

N/A

03/25e

2,007

104.0

92

10

6.8

1.6

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

Resilient performance in more difficult markets

Economic slowdown affected volumes in the Netherlands and Belgium, which, combined with inflationary pressures, provided significant headwinds. Pricing and cost actions largely compensated, enabling overall profitability to be maintained (EBIT €132.9m vs €133.6m in FY22). Earnings per share declined 8% due to the higher tax charge and minorities. Cash generation was positive despite continued growth investment in circular innovations (primarily additional sorting lines), development of end products at ATM and the Renewi 2.0 digitisation programme. Underlying net debt increased from €303m to €371m due primarily to the acquisition of Paro in the year.

Medium-term strategy update

Management revealed a medium-term (FY28) target to add c €1bn of revenues (c 50%) at ‘high single digit margins or better’ (FY23 margin 7.0%) to be achieved half through organic growth and half from acquisitions. Management pointed to €400m of internally generated growth ideas, while c 20% market share suggests consolidation opportunities in the Netherlands and Belgium. Management will also consider specialist recycling acquisitions (eg electricals), in other territories.

Outlook and forecasts

Management guidance is unchanged with the addition of the intention to pay a dividend in FY24. However, we have adjusted our numbers, primarily at the EPS level to reflect higher tax rate and minorities; FY24 EBIT €128m to €129m, PBT €93m to €92m, EPS €0.84 to €0.81. Our dividend expectation is unchanged at €0.05 a share.

Valuation

Our European peer group comparison provides a valuation of 913p after taking into account 154p per share for the UK municipal contract provisions. Our DCF valuation, using a cost of capital of 9.5% and terminal growth rate of 2%, comes to 926p. This suggests a significant valuation gap, which we would expect to narrow as the consistency of earnings and growth initiatives come through.

FY23 results

Overall

The results were similar to the record FY22, despite more difficult trading conditions from a weaker economic environment and inflationary pressures in the key Netherlands and Belgium markets along with softening recyclate pricing from Q2. Sales increased 1%, due to the Paro acquisition, and margins decreased marginally from 7.1% to 7.0% leaving operating profit flat. PBT was down 1% but earning per share down 8% due to an increased tax rate due to geographical profit mix and higher minority interests (strong performance from Maltha). Underlying cash generation was positive but net debt (before UK Public Private Partnership debt and finance leases) increased to €371m due to the Paro acquisition.

Commercial Waste division

Exhibit 1: Commercial division results (€m)

FY21

FY22

H1

H2

FY23

Revenue:

Netherlands

828.4

896.2

459.3

472.7

932

Belgium

412.9

466.9

235.1

233.3

468.4

Intersegment

(0.7)

(2.6)

(1.6)

(1.5)

(3.1)

Revenue

1,240.6

1360.5

694.4

702.9

1397.3

Operating margin:

Netherlands

6.5%

10.4%

8.8%

7.7%

8.3%

Belgium

5.6%

9.1%

12.0%

10.4%

11.2%

Operating margin

6.2%

10.0%

9.9%

8.7%

9.3%

Operating profit:

Netherlands

53.7

93.1

40.3

36.6

76.9

Belgium

23.1

42.6

28.1

24.3

52.4

Operating profit

76.8

135.7

68.4

60.9

129.3

Source: Renewi

The Netherlands performance decreased due to delays in price increases, reflecting contract terms, and cost actions as the market softened as well as mix, including higher exposure to weaker recyclates (eg paper). Trading at the Paro acquisition, now called Renewi Westport, was disrupted by integration issues, reporting a small loss for the period. Belgium revenue was flat with an improved mix as low-margin business was exited, which, with pricing and cost actions undertaken early, enabled further margin progression. Investment in an advanced sorting line in Ghent is expected to assist in the current year with a similar facility at Puurs also under construction.

Mineralz & Water division

Exhibit 2: Mineralz & Water division results (€m)

FY21

FY22

H1

H2

FY23

Revenue

182.8

193.9

93.3

97.6

190.9

Operating margin

0.2%

3.0%

2.8%

-2.2%

0.3%

Operating profit

0.3

5.8

2.6

(2.1)

0.5

Source: Renewi

The Mineralz & Water division’s performance was affected by one-off costs concerning an operating issue in the water business in Q4, offsetting positive volumes, and continued costs associated with the legacy TGG (thermally treated soil) stockpile and disposal. The residual soil has been reduced from 1,500kt in 2020 to 600kt and, while little progress was made in FY23, contracts are in place for 130kt and in finalisation for a further 300kt supporting management aims to fully resolve this issue before the end of FY25. In conjunction, development continues to progress the sand, gravel and filler lines to enable future conversion to products that can be used primarily in the concrete industry.

Specialities division

Exhibit 3: Specialities division results (€m)

FY21

FY22

H1

H2

FY23

Revenue

300.7

350.1

186.3

162.3

348.6

Operating margin

0.8%

1.2%

6.1%

3.6%

4.9%

Operating profit

2.4

4.1

11.3

5.8

17.1

Source: Renewi

The Specialities division’s strong performance was driven by ‘excellent’ performances in the specialist recycling operations, Maltha (glass) and Coolrec (electricals), along with IAS37 accounting changes benefiting UK Municipals performance by €5m. The specialist recycling businesses continue to build strong customer relationships, including agreements with Playmobil and Electrolux, as companies increase the level of recycled content in their products and are therefore looking to secure high-quality, long-term supply. The UK Municipals public private partnership (PPP) provisions were increased by €27m to reflect inflation, additional cost and lower volume impacts with a further €52m adjustment made to the opening provision to reflect the adoption of IAS37 requiring central costs for managing the contracts to be provided for.

Cash flow

Cash generation before acquisitions (€60.5m including debt) was positive but continues to be held back by a number of factors. These include provision spend (COVID-19 tax deferrals €19.7m, UK Municipals €12.2m and ATM soil offtake €1.2m), investment in growth projects (growth capex €30.8m, Renewi 2.0 and other €4.1m) as well as maintenance capex and working capital outflows reversing COVID-19 restraints. Net debt was €371m (excluding €69m UK PPP debt and €255m leases associated with the vehicle fleet and long leaseholds for waterside properties in the Netherlands) with net debt/EBITDA of 1.8x. FY24 cash flow will be similarly affected. However, a number of these issues (COVID-19 tax deferral catch up, additional capex and Renewi 2.0) will be significantly reduced or completed in the year, enabling improved cash generation in FY25.

Exhibit 4: Debt progression

Source: Renewi

Strategic progress

Management has previously targeted €60m of additional EBIT by FY26, of which €20m has been delivered to date. The digitalisation/restructuring programme Renewi 2.0 is largely complete, with €20m run-rate benefits expected to be achieved in FY24 at a cost of €28m against the budgeted €40m. The associated investment in digital is also starting to deliver significant commercial benefits. The €100m capex programme in circular innovations has seen €60m deployed with the key project, three advanced sorting lines in Belgium, which are due to post their first meaningful commercial revenues in FY24. The final element, the turnaround of ATM, is around one year behind schedule but still on target for at least €20m benefit by FY26. A further element of the strategy is to increase the recycling rate to 75%. The reported rate increased from 61.8% to 63.6% although it is worth noting the adoption of international standards has seen a reduction in the reported rate (due primarily to the classification of water evaporation).

Outlook and strategy

Management’s expectations for the current year are unchanged. In the Commercial division, volumes are expected to follow economic patterns and, while profitability will benefit from cost and pricing actions, there will be a headwind from lower recyclate prices, which benefited Q123. Mineralz & Water should return to more normal trading in the absence of the one-off costs in water. More interesting were management’s comments on medium-term targets to add c €1bn or c 50% to revenue by 2028 at ‘high single digit margins as a minimum’, which compare to group returns of 7.0% in FY23. This is to come from a combination of organic growth and acquisitions. The corporate activity strategy includes consolidation within the key Netherlands and Belgium markets (current market share c 20%) along with specialist businesses in other territories. Management guidance is for €100m a year acquisition spend, the group has over €300m of available liquidity, along with the intention to maintain a strong balance sheet with net debt/EBITDA around 2x.

Forecasts

Management has not changed guidance. However, we have adjusted our forecasts, primarily EPS, factoring in a higher tax rate to reflect the mix of profits, increased balance towards Belgium, and higher minorities reflecting their improved performance in FY23.

Exhibit 5: Forecast changes (€m)

FY24e

FY25e

Old

New

Change

Old

New

Change

Revenues

1,927

1,925

-0.1%

2,006

2,007

0.0%

Normalised operating profit

128

129

0.9%

139

147

5.6%

Normalised operating profit margin

6.7%

6.7%

0.1%

6.9%

7.3%

0.4%

Normalised PBT

93

92

-0.6%

100

104

4.2%

Reported PBT

79

82

3.0%

94

98

4.5%

Normalised basic EPS (c)

84

81

-3.5%

90

92

1.4%

Dividend per share (c)

5

5

0.0%

10

10

0.0%

Closing core net debt/(cash)

462

429

-7.1%

480

441

-8.1%

Closing PPP/PFI lease finance

222

255

14.8%

222

255

14.8%

Closing net debt/(cash)

763

753

-1.3%

781

765

-2.0%

Source: Edison Investment Research


Valuation

Our peer group valuation looks across Europe, reflecting the lack of UK-listed peers. Note that we have adjusted our valuation to reflect the provisions associated with the UK Municipal onerous contracts (€142m or 154p a share as per note 13 in the financial release). This provides an average price of 913p a share.

Exhibit 6: P/E based peer valuation

 

Market cap

P/E

Company

£m

2023e

2024e

2025e

Befessa

1,326

16.5

13.3

13.1

Groupe Pizzono

163

10.5

16.0

15.3

Lassila & Tikanoja

337

13.2

11.6

10.9

Mo-Bruk

186

9.2

8.2

7.2

Seche

691

14.8

13.8

11.5

Veolia

16,986

15.0

12.4

11.5

Cabka

144

32.8

15.8

10.5

Average

16.0

13.0

11.4

Renewi EPS (c)

81.0

92.0

104.0

Renewi valuation per share (c)

1295

1197

1189

Provisions per share (c)

(178)

(178)

(178)

Renewi valuation per share (c)

1118

1019

1011

Renewi valuation per share (p)

972

886

879

Source: Refinitiv (24 May 2023), Edison Investment Research

Our DCF valuation is not adjusted for the provisions as these are taken into account within the cash flow forecasts. Exhibit 7 provides a valuation relative to the cost of capital and terminal growth rate. A cost of capital of 9.5% and a conservative terminal growth rate of 2% translate to a valuation of 926p a share.

Exhibit 7: DCF valuation sensitivity, p/share

Terminal growth rate

Cost of capital

1.0%

2.0%

3.0%

4.0%

11.0%

633

690

762

853

10.5%

693

760

843

953

10.0%

760

838

937

1,070

9.5%

835

926

1,045

1,208

9.0%

920

1,028

1,172

1,374

8.5%

1,016

1,146

1,322

1,577

8.0%

1,127

1,283

1,502

1,831

Source: Edison Investment Research

Exhibit 8: Financial summary

€m

2022

2023

2024e

2025e

2026e

Year to 31 March (€m)

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,869.2

1,892.3

1,924.9

2,007.1

2,092.3

Cost of Sales

(1,512.5)

(1,538.4)

(1,563.0)

(1,625.7)

(1,694.7)

Gross Profit

356.7

353.9

361.9

381.3

397.5

EBITDA

 

 

261.5

257.0

254.9

274.8

294.6

Operating profit (before amort. and excepts.)

 

133.6

133.6

132.9

129.4

146.9

Amortisation of acquired intangibles

(3.4)

(5.0)

(5.5)

(6.0)

(6.0)

Exceptionals

(6.2)

(5.6)

(5.0)

0.0

0.0

Reported operating profit

124.0

122.3

118.9

140.9

155.6

Net Interest

(28.8)

(29.2)

(37.1)

(42.9)

(44.1)

Joint ventures & associates (post tax)

0.5

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

105.3

103.7

92.4

104.0

117.5

Profit Before Tax (reported)

 

 

95.7

93.1

81.9

98.0

111.5

Reported tax

(20.3)

(26.5)

(20.5)

(24.5)

(27.9)

Profit After Tax (norm)

78.8

75.6

67.9

77.0

86.9

Profit After Tax (reported)

75.4

66.6

61.4

73.5

83.6

Minority interests

(0.9)

(3.7)

(2.5)

(3.0)

(3.0)

Net income (normalised)

77.9

71.9

65.4

74.0

83.9

Net income (reported)

74.5

62.9

58.9

70.5

80.6

Av. Shares outstanding (m)

79.7

80.3

80.5

80.7

81.0

EPS - normalised (c)

 

 

98

90

81

92

104

EPS - normalised fully diluted (c)

 

 

98

89

81

91

103

EPS - basic reported (c)

 

 

93

78

73

87

100

Dividend (c)

0.0

0.0

5.0

10.0

12.5

Revenue growth (%)

10.4

1.2

1.7

4.3

4.2

Gross Margin (%)

19.1

18.7

18.8

19.0

19.0

EBITDA Margin (%)

14.0

13.6

13.2

13.7

14.1

Normalised Operating Margin

7.1

7.0

6.7

7.3

7.7

BALANCE SHEET

Fixed Assets

 

 

1,565.9

1,686.2

1,730.7

1,767.9

1,794.8

Intangible Assets

592.8

636.3

630.8

625.3

619.8

Tangible and Right-of-use Assets

767.4

871.0

921.0

963.7

996.1

Investments & other

205.7

178.9

178.9

178.9

178.9

Current Assets

 

 

385.9

399.3

403.6

423.6

444.8

Stocks

22.5

25.2

27.2

28.4

29.6

Debtors

269.3

289.6

294.6

313.5

333.4

Cash & cash equivalents

63.6

62.7

60.0

60.0

60.0

Other

30.5

21.8

21.8

21.8

21.8

Current Liabilities

 

 

(732.7)

(665.4)

(695.6)

(713.3)

(731.5)

Creditors

(528.4)

(521.8)

(518.8)

(536.5)

(554.7)

Tax and social security

(24.2)

(31.2)

(31.2)

(31.2)

(31.2)

Short term borrowings

(148.9)

(66.8)

(100.0)

(100.0)

(100.0)

Other

(31.2)

(45.6)

(45.6)

(45.6)

(45.6)

Long Term Liabilities

 

 

(880.9)

(1,072.8)

(1,039.1)

(1,011.2)

(963.8)

Long term borrowings

(518.7)

(681.6)

(712.9)

(725.0)

(702.6)

Other long term liabilities

(362.2)

(391.2)

(326.2)

(286.2)

(261.2)

Net Assets

 

 

338.2

347.3

399.6

467.0

544.3

Minority interests

(7.0)

(10.1)

(10.1)

(10.1)

(10.1)

Shareholders' equity

 

 

331.2

337.2

389.5

456.9

534.2

CASH FLOW

Operating Cash Flow

261.5

257.0

254.9

274.8

294.6

Working capital

(59.9)

(23.8)

(10.0)

(2.3)

(2.9)

Exceptional & other

(17.1)

(23.6)

(71.0)

(41.0)

(26.0)

Tax

(7.6)

(21.2)

(24.5)

(27.1)

(30.5)

Net operating cash flow

 

 

176.9

188.4

149.4

204.4

235.1

Capex

(77.3)

(118.1)

(125.0)

(120.0)

(115.0)

Acquisitions/disposals

(3.2)

(60.7)

0.0

0.0

0.0

Net interest

(17.2)

(21.3)

(37.7)

(43.5)

(44.7)

Equity financing

(1.6)

(4.7)

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

(8.0)

(8.0)

Net Cash Flow

77.6

(16.4)

(13.2)

32.9

67.4

Opening net debt/(cash)

 

 

(343.7)

(303.1)

(370.7)

(428.9)

(441.0)

FX

7.6

(0.2)

0.0

0.0

0.0

Other non-cash movements

(44.6)

(51.0)

(45.0)

(45.0)

(45.0)

Closing net debt/(cash)

 

 

(303.1)

(370.7)

(428.9)

(441.0)

(418.6)

Finance Leases (FRS16)

(221.9)

(254.8)

(254.8)

(254.8)

(254.8)

PPP non-recourse

(79.1)

(69.3)

(69.3)

(69.3)

(69.3)

Closing net debt/(cash)

 

 

(604.1)

(694.8)

(753.0)

(765.1)

(742.7)

Source: Renewi, Edison Investment Research estimates

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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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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S&U, the specialist motor and property finance lender, reported a good start to the financial year with profit before tax (PBT) up £0.3m in the period to 24 May despite group borrowing costs increasing by £3m versus the same period last year. A new £230m funding facility has increased total funding facilities to £280m, giving the group just under £100m to fund its growth plans over the next two years. Although rising interest rates are a headwind, credit quality remains strong, and S&U expects growth to continue in FY24. Our estimates remain unchanged.

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