Renewi — Standing up to end-market pressures

Renewi (LSE: RWI)

Last close As at 27/03/2024

GBP5.64

−1.00 (−0.18%)

Market capitalisation

GBP456m

More on this equity

Research: Industrials

Renewi — Standing up to end-market pressures

Renewi’s rating reflects the historical volatility in margin performance and profits. If management can deliver on its full year guidance, performance from the restructured group should be far more resilient, which should start to improve the valuation.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Renewi

H123 results

Industrial support services

17 November 2022

Price

555p

Market cap

£444m

£/€1.15

Net debt (€m, ex-PPP/PFI finance and IFRS 16 leases) at end-September 2022

388m

Shares in issue

80.1m

Free float

98.8%

Code

RWI

Primary exchange

LSE

Secondary exchange

Euronext Amsterdam

Share price performance

%

1m

3m

12m

Abs

9.9

(33.6)

(32.5)

Rel (local)

1.9

(31.4)

(30.0)

52-week high/low

851p

489p

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

Q323 update

TBC

Analyst

David Larkam

+44 (0)20 3077 5700

Renewi is a research client of Edison Investment Research Limited

Renewi’s rating reflects the historical volatility in margin performance and profits. If management can deliver on its full year guidance, performance from the restructured group should be far more resilient, which should start to improve the valuation.

Standing up to end-market pressures

Year

end

Revenue (€m)

PBT*
(€m)

EPS*
©

DPS
©

P/E
(x)

Yield
(%)

03/21

1,694

48

45

0

14.2

N/A

03/22

1,869

105

98

0

6.5

N/A

03/23e

1,899

97

87

0

7.3

N/A

03/24e

1,959

93

84

5

7.6

0.8

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

H123 results overview

Sales increased 4% to €952m y-o-y, driven by pricing increases. Underlying EBIT increased 16% to €75.2m with operating margins of 7.9%, up from 7.1%. Underlying PBT of €61.6m was up 20% and underlying EPS increased 17% to 56c. Core net debt increased to €388m (March 2022: €303m) reflecting the Paro acquisition (€66m) and growth capital investments (€16m) with a net debt to EBITDA ratio of 1.7x. The Commercial division increased revenues by 4% despite volume decline of c 9% (Netherlands -7%, Belgium -13%) due to higher recyclate prices. Margins increased from 9.6% to 9.9%, due to tight cost control and inflationary pass through. Specialities division revenues grew 11% with underlying operating profit of €11.3m, up from €1.7m driven by non-recurring items, particularly relating to UK Municipal, as well as improvements in Coolrec (electrical waste recycling) and Maltha (glass recycling). Mineralz & Water revenues were flat at €93.3m and underlying operating profit decreased to €2.6m from €4.0m y-o-y, primarily due to accounting changes increasing the depreciation charge, with the waterside business performing well, offsetting softer soil volumes. The group recycling rate increased to 68.4% (March 2022: 67.2%), showing progress towards the target of 75%.

Outlook and forecasts

Management guidance is unchanged despite the strong H1 as management negotiates the more challenging macroeconomic environment and inflationary pressures. FY23 profit forecast is unchanged. FY24 operating profit is reduced by €10m, primarily due to economic weakness and recyclate price softness affecting the Commercial division (PBT down from €103m to €93m). Given the economic outlook, level of debt (net debt EBITDA ratio c 2.0x) and future capital commitments, we see a reinstatement of the dividend as less likely in this financial year.

Valuation: Shares discounting economic headwinds

As discussed in our October update note, the recent offer for Biffa, the only remaining UK peer, equates to £10.91 per Renewi share, even after adjusting for a 30% acquisition premium. The forward P/E of c 7x also suggests value if the management guidance can be achieved.

Results overview

H123 sales increased 4% to €952m, driven by pricing increases. Underlying EBIT increased 16% to €75.2m with operating margins of 7.9%, up from 7.1%. This generated underlying PBT of €61.6m and continuing the positive trend seen over recent reporting periods (Exhibit 1). Underlying EPS was 56c, up 17% y-o-y.

Exhibit 1: Renewi performance

Source: Renewi

Commercial division

Exhibit 2: Commercial division half-yearly results

H120

H220

H121

H221

H122

H222

H123

Sales (€m)

595.0

654.2

595.0

645.6

670.6

689.9

694.4

Operating profit (€m)

29.4

49.2

29.4

47.4

64.7

71.0

68.4

Operating margin (%)

4.9

7.5

4.9

7.3

9.6

10.3

9.9

Source: Renewi

Waste volumes treated by Renewi have been affected by lower economic activity and a shift from recycling to incineration where waste to energy plants benefit from the higher energy pricing; Netherlands volumes fell 7%, Belgium dropped 13%. Despite this, inbound revenues remained steady due to positive pricing, while outbound revenues increased thanks to higher recyclate prices. However, recyclate prices have generally eased since Q1 with glass, steel, paper and plastics weaker, although above historical levels, which suggests a headwind for H2, albeit wood pricing remains strong.

Management remains confident on pricing as cost inflation impacts across the sector. In addition, the Paro acquisition will start to be integrated over the second half. The first of three investments in advanced sorting lines in Belgium, totalling €60m, has been completed and will be commissioned in H2; this is a key element of management’s growth strategy.

Mineralz & Water division

Exhibit 3: Mineralz & Water half-yearly results

H120

H220

H121

H221

H122

H222

H123

Sales (€m)

90.4

90.4

90.4

92.4

93.6

100.3

93.3

Operating profit (€m)

2.3

3.3

2.3

(2.0)

4.0

1.8

2.6

Operating margin (%)

2.5

3.7

2.5

(2.2)

4.3

1.8

2.8

Source: Renewi

The waterside business continues to perform well, with 22% growth in volumes and good margins reported by management. However, overall divisional performance continues to be affected by ATM, while depreciation, following recent investment, was also higher. ATM has now fully realigned to producing sand, gravel and filler for the asphalt and concrete sector rather than decontaminated soil. Further certification is still required before commercial volumes can be achieved. The legacy thermally cleaned soil inventory was 0.6mt (down marginally from 0.7mt), absorbing a further €1.1m (H122 €3.4m) of exceptional charges. Management remains confident of a potential €20m EBIT for the division.

Specialities division

Exhibit 4: Specialities half-yearly results

H120

H220

H121

H221

H122

H222

H123

Sales (€m)

149.4

173.8

149.4

151.3

168.0

182.1

186.3

Operating profit (€m)

0.0

(1.3)

0.0

2.4

1.7

2.4

11.3

Operating margin (%)

0.0

(0.7)

0.0

1.6

1.0

1.3

6.1

Source: Renewi

The step change in operating profit was primarily due to one-off items (€8.7m of the €9.6m improvement), particularly the change in accounting and provisioning for onerous contracts (€4.2m vs €0.5m). Coolrec (electrical waste recycling) and Maltha (glass recycling) continued to improve their performance, both generating double-digit operating margins in the period.

Margin and cost analysis

Operating margins have been increasing, with underlying margins of 7.9% in H123. Given the slowing economic situation and cost inflation, there will be concerns about the sustainability of these returns, as there are for most companies. Exhibit 6 provides a breakdown of Renewi’s operating costs. Management suggests that over half of these costs are variable. Note that the union labour agreement in the Netherlands is for a wage increase of 7.5% from January and will impact across the sector, while Renewi has some further hedging benefits within its utilities. The Renewi 2.0 restructuring programme will continue to focus on efficiency at the SG&A level. Adding that management estimates that over half the cost base is flexible and pricing has been positive as cost issues impact across the sector supports management expectations for robust margin performance.

Exhibit 5: Underlying operating margin

Exhibit 6: Cost breakdown

Source: Renewi

Source: Renewi

Exhibit 5: Underlying operating margin

Source: Renewi

Exhibit 6: Cost breakdown

Source: Renewi

Exceptionals

Exceptionals primarily reflect the historical issues of the group. Of particular note in the first half were the changes in long-term provisions due to inflation and changes to discount rates.

Exhibit 7: Non-trading and exceptional items (€m)

H123

H122

Renewi 2.0 business improvement programme

(2.0)

(4.0)

Portfolio management/disposals

5.5

Inflationary/discount rate changes to provisions (primarily UK Municipal)

6.4

Software configuration

(1.7)

Finance exceptional (Cumbria PPP interest rate swap)

1.6

(0.1)

Amortisation of acquired intangibles

(1.5)

(1.6)

Operational exceptionals net

10.0

7.4

Tax impact of exceptionals and exceptional tax items

(1.9)

(5.4)

Total

8.1

2.0

Source: Renewi

Cash flow

Adjusted free cash flow from operations was €21.8m, converting to free cash flow of €4.1m after the cost of legacy issues (COVID-19 tax deferral €9.9m, legacy ATM soil offtake €1.1m and UK Municipal contracts €6.7m). Post-expansionary capex of €16.0m and acquisitions/disposals (primarily Paro) of €60.1m meant core net debt increased to €388m and led to a net debt/EBITDA ratio of 1.7x.

Exhibit 8: Core net debt progression

Source: Renewi, Edison Investment Research

Outlook

After a positive first half, management’s guidance for the full year remains unchanged, reflecting the uncertainties in the economic environment and the potential impact on waste volumes along with the generally weaker recyclate prices. The company has reduced the expected capex (replacement and growth) for the year by c €20m to c €120m due to timing and delivery phasing. Management expect leverage on core net debt/EBITDA ratio of 2.0x at the year-end (covenant limits 3.5x).

Forecasts

We have left FY23 forecast unchanged with the exception of EPS which is reduced by 3.6% due to a higher expected tax rate. We have reduced FY24 operating profit by €10m primarily due to lower profits expected in the Commercial division, in particular due to recyclate cost. Given the economic outlook, level of debt (net debt EBITDA ratio c 2.0x) and future capital commitments, we see a reinstatement of the dividend as less likely in this financial year.

Exhibit 9: Forecast changes

€m

2023

2024

Old

New

Change

Old

New

Change

Revenues

1,906

1,899

-0.4%

1,959

1,927

-1.6%

Normalised operating profit

129

128

-0.3%

138

128

-7.3%

Normalised operating profit margin

6.8%

6.8%

0.0%

7.1%

6.7%

-0.4%

Normalised PBT

97

97

-0.2%

103

93

-10.1%

Reported PBT

84

84

-0.2%

90

79

-11.6%

Normalised basic EPS ©

90

87

-3.6%

96

84

-12.0%

Dividend per share ©

5

0

-100.0%

10

5

-50.0%

Closing core net debt/(cash)

403

415

3.1%

437

462

5.7%

Source: Edison Investment Research


Exhibit 10: Financial summary

Year to March (€m)

2021

2022

2023e

2024e

2025e

INCOME STATEMENT

Revenue

 

 

1,693.6

1,869.2

1,898.5

1,927.1

2,006.3

Cost of Sales

(1,408.5)

(1,512.5)

(1,543.5)

(1,564.8)

(1,625.1)

Gross Profit

285.1

356.7

355.0

362.3

381.2

EBITDA

 

 

202.2

261.5

252.4

252.6

265.6

Operating profit (before amort. And excepts.)

 

 

73.0

133.6

128.4

128.3

139.1

Amortisation of acquired intangibles

(3.3)

(3.4)

(5.0)

(5.5)

(6.0)

Exceptionals

(33.6)

(6.2)

(8.0)

(8.0)

0.0

Reported operating profit

36.1

124.0

115.4

114.8

133.1

Net Interest

(26.8)

(28.8)

(31.4)

(35.3)

(39.3)

Joint ventures & associates (post tax)

1.6

0.5

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

47.8

105.3

97.0

93.0

99.8

Profit Before Tax (reported)

 

 

10.9

95.7

84.0

79.5

93.8

Reported tax

(5.4)

(20.3)

(21.0)

(19.9)

(23.5)

Profit After Tax (norm)

35.8

78.8

71.3

68.3

73.4

Profit After Tax (reported)

5.5

75.4

63.0

59.6

70.4

Minority interests

(0.1)

(0.9)

(2.0)

(1.0)

(1.0)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

35.7

77.9

69.3

67.3

72.4

Net income (reported)

5.4

74.5

61.0

58.6

69.4

Average Number of Shares Outstanding (m)

79.5

79.7

80.0

80.0

80.0

EPS – normalised ©

 

 

45

98

87

84

90

EPS – normalised fully diluted ©

 

 

45

98

86

84

90

EPS – basic reported ©

 

 

7

93

76

73

87

Dividend ©

0.0

0.0

0.0

5.0

10.0

Revenue growth (%)

10.4

1.6

1.5

4.1

Gross Margin (%)

16.8

19.1

18.7

18.8

19.0

EBITDA Margin (%)

11.9

14.0

13.3

13.1

13.2

Normalised Operating Margin

4.3

7.1

6.8

6.7

6.9

BALANCE SHEET

Fixed Assets

 

 

1,612.3

1,565.9

1,596.9

1,648.1

1,672.6

Intangible Assets

594.9

592.8

585.1

577.4

569.7

Tangible and Right-of-use Assets

794.5

767.4

806.1

865.0

897.2

Investments & other

222.9

205.7

205.7

205.7

205.7

Current Assets

 

 

355.7

385.9

389.3

392.0

415.8

Stocks

20.6

22.5

24.5

24.6

25.6

Debtors

247.7

269.3

274.3

276.9

299.7

Cash & cash equivalents

68.8

63.6

60.0

60.0

60.0

Other

18.6

30.5

30.5

30.5

30.5

Current Liabilities

 

 

(646.7)

(732.7)

(673.8)

(675.8)

(692.9)

Creditors

(546.2)

(528.4)

(518.4)

(520.4)

(537.5)

Tax and social security

(13.8)

(24.2)

(24.2)

(24.2)

(24.2)

Short term borrowings

(47.8)

(148.9)

(100.0)

(100.0)

(100.0)

Other

(38.9)

(31.2)

(31.2)

(31.2)

(31.2)

Long Term Liabilities

 

 

(1,083.7)

(880.9)

(998.2)

(1,005.0)

(994.0)

Long term borrowings

(689.1)

(518.7)

(676.0)

(722.8)

(740.8)

Other long term liabilities

(394.6)

(362.2)

(322.2)

(282.2)

(253.2)

Net Assets

 

 

237.6

338.2

314.2

359.4

401.5

Minority interests

(6.1)

(7.0)

(7.0)

(7.0)

(7.0)

Shareholders’ equity

 

 

231.5

331.2

307.2

352.4

394.5

CASH FLOW

Operating Cash Flow

202.2

261.5

252.4

252.6

265.6

Working capital

82.4

(59.9)

(17.0)

(0.8)

(6.7)

Exceptional & other

(31.1)

(17.1)

(49.1)

(44.5)

(33.5)

Tax

(14.8)

(7.6)

(45.7)

(39.6)

(41.5)

Net operating cash flow

 

 

238.7

176.9

140.6

167.7

184.0

Capex

(57.6)

(77.3)

(105.0)

(135.5)

(111.1)

Acquisitions/disposals

(2.7)

(3.2)

(58.0)

0.0

0.0

Net interest

(15.9)

(17.2)

(29.6)

(34.0)

(38.0)

Equity financing

(1.2)

(1.6)

(5.0)

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

(8.0)

Net Cash Flow

161.3

77.6

(57.0)

(1.8)

27.0

Opening net debt/(cash)

 

 

(456.9)

(343.7)

(303.1)

(415.1)

(461.9)

FX

(6.4)

7.6

0.0

0.0

0.0

Other non-cash movements

(41.7)

(44.6)

(55.0)

(45.0)

(45.0)

Closing core net debt/(cash)

 

 

(343.7)

(303.1)

(415.1)

(461.9)

(479.9)

Finance Leases (FRS16)

(236.7)

(221.9)

(221.9)

(221.9)

(221.9)

PPP non-recourse

(87.6)

(79.1)

(79.1)

(79.1)

(79.1)

Closing net debt/(cash)

 

 

(668.0)

(604.1)

(716.1)

(762.9)

(780.9)

Source: Renewi, Edison Investment Research

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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.

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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.

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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 2022 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.

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.

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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