Renewi — Softer construction market affecting profitability

Renewi (LSE: RWI)

Last close As at 20/06/2024

GBP6.89

−11.00 (−1.57%)

Market capitalisation

GBP556m

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Research: Industrials

Renewi — Softer construction market affecting profitability

Renewi is a well-placed strategic asset given its standing in the circular economy and market-leading positions in the Netherlands and Belgium. The Q3 update highlighted weaker construction and demolition markets in the Netherlands leading to reduced company guidance, although management has taken swift action to reduce costs. As these benefits come through, confidence in the company and its long-term opportunities should drive the share price once more.

David Larkam

Written by

David Larkam

Analyst, Industrials

Renewi_resized

Industrials

Renewi

Softer construction market affecting profitability

Q3 trading update

Industrial support services

31 January 2024

Price

591p

Market cap

£506m

€1.15/£

Net debt pre-PPPs and leases at 30 September 2023

€383m

Shares in issue

80.5m

Free float

98.8%

Code

RWI

Primary exchange

LSE

Secondary exchange

Amsterdam Euronext

Share price performance

%

1m

3m

12m

Abs

(7.7)

0.5

(7.7)

Rel (local)

(6.7)

(5.1)

(6.0)

52-week high/low

734p

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

Full year results

30 May 2024

Analyst

David Larkam

+44 (0)20 3077 5700

Renewi is a research client of Edison Investment Research Limited

Renewi is a well-placed strategic asset given its standing in the circular economy and market-leading positions in the Netherlands and Belgium. The Q3 update highlighted weaker construction and demolition markets in the Netherlands leading to reduced company guidance, although management has taken swift action to reduce costs. As these benefits come through, confidence in the company and its long-term opportunities should drive the share price once more.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/22

1,869

105.3

98

0

6.9

0.0

03/23

1,892

103.7

90

0

7.6

0.0

03/24e

1,843

69.9

60

5

11.3

0.7

03/25e

1,891

83.1

71

10

9.5

1.5

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

Q3 trading affected by weaker Netherlands construction and demolition sector

Activity in the Netherlands’ construction sector continues to be weak, with the latest data for October 2023 showing a 27% annual decrease in the new projects started index (source Centraal Bureau voor de Statistiek). Management announced a programme to generate €15m of cost savings at the interim results, which are now in place and are expected to benefit H224 by €5m. The Belgian business remains more resilient. The demolition and site preparation index was off by 1% in October/November 2023. Nevertheless, the weakness in end markets now suggests overall profitability of the key Commercial Waste division will be below previous expectations. The Mineralz & Water performance has shown the expected volume recovery in the Water business and Specialities expectations are unchanged, with Maltha (glass recycling) remaining strong. However, Coolrec (electronic and electrical equipment recycling) is experiencing headwinds from weaker recyclate (ie plastic) prices. For FY24 our forecast changes are that we now expect EBIT of €109m (down 12.8% from €125m), PBT of €70m (down 18.6% from €86m previously), EPS of 60c (down 19.3% from 75c) and DPS of 5.0c (unchanged). For FY25 we now expect EBIT €126m (down 12.2% from €144m previously), PBT of €83m (down 19.2% from €101m previously), EPS of 71c (down 18.8% from 88c previously) and DPS of 10c (unchanged).

Valuation

The reduction in short-term profit expectations inevitably has a significant impact on our peer group valuation, using shorter-term calendar 2023 and 2024 metrics. Our peer-based valuation of 578p is down from 680p. Our DCF is longer-term based and suggests a valuation of 766p down from 819p. There has been significant corporate activity of late in the sector, including Macquarie’s approach to Renewi. Our valuation based on take-out multiples is 1,052p, a healthy premium even if, like our peer-based valuation, it is affected by the short-term reduction in forecasts.

Q3 trading update

Renewi’s performance has generally been as expected with the exception of the Netherlands construction and demolition sector, which is an important end market for the Commercial Waste division.

Commercial Waste

Commercial Waste is the most important division, accounting for 81% of EBIT in H124. The construction sector, through both construction and demolition, is a key market; construction waste accounts for c 35% of all waste in the EU. The construction sector was weak in the Netherlands in H124 and the primary reason for the group’s decline in Commercial Waste Netherlands profit (€40.3m down to €25.8m). Exhibit 1 shows that the market continues to be soft, which has led to further pressure on returns. The restructuring programme announced at the interims, with a target of €15m annual savings, is on plan and management states that it will deliver a €5m benefit in H224, albeit insufficient to fully offset the weakness in the construction and demolition market. Belgium has proved more resilient; Exhibit 2 highlights the more limited decline in the construction market. Hence our expectations here remain unchanged for Commercial Waste Belgium. Despite these difficulties, we now expect the overall profit in Commercial Waste division H224 to be similar to H124, with FY25 to benefit from the full cost savings.

Exhibit 1: The Netherlands building projects started (year-on-year change)

Exhibit 2: Belgium demolition and site preparation activity (year-on-year change)

Source: Centraal Bureau voor de Statistiek

Source: Statbel

Exhibit 1: The Netherlands building projects started (year-on-year change)

Source: Centraal Bureau voor de Statistiek

Exhibit 2: Belgium demolition and site preparation activity (year-on-year change)

Source: Statbel

Mineralz & Water

The recovery in Water volumes anticipated by management at the interims has been delivered, following extended outages and maintenance in H1. The soil remediation business, ATM, continues to increase volumes of the value-added products (sand, gravel and filler) into the market. Work to reduce stocks of historical treated soil continues to plan.

Specialities

Overall, the Specialities division’s performance was in line with the company’s and our expectations, with Edison forecasting H2 profit to be similar to H1. Maltha (glass recycling) performance remains strong while Coolrec (electronic and electrical equipment recycling such as fridges) has seen some margin pressure from lower recyclate (ie plastic) prices. UK Municipal trading was stable, arguably encouraging for this sub-group of businesses. There is no further news on a potential corporate solution for the UK municipal activities at the current time.


Financials

Given the weaker trading update, we have reduced our forecasts, as highlighted in Exhibit 3.

Exhibit 3: Forecast summary

2024e

2025e

€m

Old

New

Change

Old

New

Change

Revenues

1,914

1,843

-3.7%

1,964

1,891

-3.7%

Normalised operating EBIT

125

109

-12.8%

144

126

-12.2%

Normalised operating EBIT margin

6.5%

5.9%

-0.6%

7.3%

6.7%

-0.7%

Normalised PBT

86

70

-18.6%

101

83

-18.1%

Reported PBT

75

59

-21.2%

95

77

-19.2%

Normalised basic EPS (c)

75

60

-19.3%

88

71

-18.8%

Dividend per share (c)

5

5

0.0%

10

10

0.0%

Closing core net debt/(cash)

406

413

1.6%

421

441

4.6%

Source: Edison Investment Research

Valuation

We use a combination of valuations: a DCF, peer group and take-out based on recent activity in the sector. Exhibit 4 summarises the changes in valuation. Inevitably the change to forecasts has a more significant impact on the peer group and take-out valuations as they are derived using short-term profit forecasts, while the DCF is based on longer-term expectations.

Exhibit 4: Summary valuation

p/share

Old

New

Change

DCF

819

766

-6.5%

Peer group

680

578

-15.0%

Take-out

1,207

1,052

-12.8%

Source: Edison Investment Research

Summary details of our DCF (core assumptions: WACC of 9.5% and terminal growth of 2%) and peer-based (Befessa, Cabka, Groupe Pizzono, Lassila & Tikanoja, Mo-Bruk, Seche and Veolia) valuation are shown below.

Exhibit 5: DCF summary valuation (p/share)

Cost of capital

Terminal growth rate

(WACC)

1.0%

2.0%

3.0%

4.0%

5.0%

12.0%

254

307

373

455

560

11.5%

318

379

455

552

678

11.0%

388

459

549

663

816

10.5%

466

549

655

792

980

10.0%

554

651

776

943

1,176

9.5%

652

766

916

1,121

1,416

9.0%

762

899

1,081

1,335

1,717

8.5%

888

1,052

1,275

1,597

2,104

8.0%

1,033

1,231

1,509

1,926

2,620

Source: Edison Investment Research

Exhibit 6: Peer valuation (p/share)

EV/EBIT

EV/EBITDA

P/E

2023

2024

2023

2024

2023

2024

Rating (x)

13.8

12

6.4

6.0

18.0

15

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

115

122

238

244

68

69

Valuation (€m)

1585

1464

1526

1465

Provisions (€m)

(306)

(306)

(306)

(306)

Debt (€m)

(413)

(441)

(413)

(441)

Finance leases (€m)

(246)

(246)

(246)

(246)

Pension deficit (€m)

(30)

(30)

(30)

(30)

Market cap (€m)

590

442

531

443

Number of shares (m)

80.5

80.7

80.5

80.7

Value per share (c)

733

547

660

549

1,217

1,030

Exchange rate (€/£)

1.15

1.15

1.15

1.15

1.15

1.15

Value per share (p)

638

476

574

477

1,058

895

Provision adjustment

(331)

(331)

Value per share (p)

638

476

574

477

728

565

Source: Edison Investment Research. *These are calendarized numbers.

The average peer valuation per share is 578p.

Exhibit 7: Financial summary

€m

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

1,843.3

1,891.5

Cost of Sales

(1,408.5)

(1,512.5)

(1,538.4)

(1,496.8)

(1,532.1)

Gross Profit

285.1

356.7

353.9

346.5

359.4

EBITDA

 

202.2

261.5

257.0

232.2

248.2

Operating profit (before amort. and excepts.)

 

73.0

133.6

132.9

108.8

126.4

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

98.3

120.4

Net Interest

(26.8)

(28.8)

(29.2)

(38.9)

(43.3)

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

69.9

83.1

Profit Before Tax (reported)

 

10.9

95.7

93.1

59.4

77.1

Reported tax

(5.4)

(20.3)

(26.5)

(14.9)

(19.3)

Profit After Tax (norm)

35.8

78.8

75.6

51.0

60.6

Profit After Tax (reported)

5.5

75.4

66.6

44.6

57.8

Minority interests

(0.1)

(0.9)

(3.7)

(2.5)

(3.0)

Net income (normalised)

35.7

77.9

71.9

48.5

57.6

Av. Shares outstanding (m)

79.5

79.7

80.3

80.5

80.7

EPS - normalised (c)

 

45

98

90

60

71

EPS - normalised fully diluted (c)

 

45

98

89

60

71

EPS - basic reported (c)

 

7

93

78

52

68

Dividend (c)

0.0

0.0

0.0

5.0

10.0

EBITDA Margin (%)

11.9

14.0

13.6

12.6

13.1

Normalised Operating Margin

4.3

7.1

7.0

5.9

6.7

BALANCE SHEET

Fixed Assets

 

1,612.3

1,565.9

1,686.2

1,692.8

1,701.0

Intangible Assets

594.9

592.8

636.3

630.8

625.3

Tangible and Right-of-use Assets

794.5

767.4

871.0

883.1

896.8

Investments & other

222.9

205.7

178.9

178.9

178.9

Current Assets

 

355.7

385.9

399.3

389.6

401.3

Stocks

20.6

22.5

25.2

28.2

28.9

Debtors

247.7

269.3

289.6

279.6

290.6

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)

(698.6)

(709.5)

Creditors

(546.2)

(528.4)

(521.8)

(521.8)

(532.7)

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)

(1,019.1)

(1,012.0)

Long term borrowings

(689.1)

(518.7)

(681.6)

(687.9)

(715.8)

Other long term liabilities

(394.6)

(362.2)

(391.2)

(331.2)

(296.2)

Net Assets

 

237.6

338.2

347.3

364.7

380.8

Minority interests

(6.1)

(7.0)

(10.1)

(10.1)

(10.1)

Shareholders' equity

 

231.5

331.2

337.2

354.6

370.7

CASH FLOW

Operating Cash Flow

202.2

261.5

257.0

232.2

248.2

Working capital

82.4

(59.9)

(23.8)

7.0

(0.8)

Exceptional & other

(31.1)

(17.1)

(23.6)

(66.0)

(36.0)

Tax

(14.8)

(7.6)

(21.2)

(18.9)

(22.4)

Net operating cash flow

 

238.7

176.9

188.4

154.3

189.0

Capex

(57.6)

(77.3)

(118.1)

(112.0)

(120.0)

Acquisitions/disposals

(2.7)

(3.2)

(60.7)

0.0

0.0

Net interest

(15.9)

(17.2)

(21.3)

(39.5)

(43.9)

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)

2.8

17.1

Opening net debt/(cash)

 

(456.9)

(343.7)

(303.1)

(370.7)

(412.9)

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)

(412.9)

(440.8)

Finance Leases (FRS16)

(236.7)

(221.9)

(245.8)

(245.8)

(245.8)

PPP non-recourse

(87.6)

(79.1)

(69.3)

(69.3)

(69.3)

Closing net debt/(cash)

 

(668.0)

(604.1)

(685.8)

(728.0)

(755.9)

Source: Company accounts, 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 2024 Edison Investment Research Limited (Edison).

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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

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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 2024 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.

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Research: Healthcare

Biodexa Pharmaceuticals — Foray into T1D expands business scope

Biodexa has completed the acquisition of global rights to tolimidone from Adhera Therapeutics after a successful $6m (gross proceeds) equity raise, conditional on at least $4m being subscribed for by Adhera secured noteholders. Tolimidone is a clinical-stage lyn kinase activator, which management plans to develop as a potentially disease-modifying treatment for type I diabetes (T1D), bolstering Biodexa’s clinical pipeline and expanding its therapeutic focus beyond oncology. The deal closure follows Biodexa’s completion of a $6m (gross proceeds) equity raise by issuing c 3m stock units at c $2/unit (including ADS/pre-funded warrants along with two attached warrants). The fund-raise is anticipated to support a planned Phase IIa trial in Q224, followed by a Phase IIb trial in Q424.

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