Renew General Discussion

29th Jul '09 by marben100

11 comments 6001 reads

Renew Holdings (ex-Montpellier) is looking like an interesting value proposition at the current SP of around 30p (market cap £18m). With net cash of around £17.5m; NTAV of £6.7m; current year adjusted EPS f/c of 6.7p; current year DPS forecast of 3.0p, it may be worthwhile... [cash & NTAV figures are derived from the most recent interim results . Forecasts are from a 23rd July 2009 note by Hardman]

The shareprice has slumped to reflect declining earnings in the UK construction sector (and no recovery in EPS is yet forecast). What I like about Renew is its focus on "specialist engineering" and "specialist construction". Its nuclear, water and land remediation subsidiaries are of particular interest. These offer better margins than the dire ones in the general construction sector. The new management team, installed since the Montpellier days, seem to be performing well (relative to their peers) and moving the company in the right direction.

Positive news of £20m of new orders in its nuclear subsidiary have recently been announced: http://fool.uk-wire.com/cgi-bin/articles/200907230700141303W.html

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marben100

29th Jul '09

I have started this thread mainly to highlight (and discuss) a new analyst nore from Hardman on the company, which can be found here: http://www.hardmanandco.com/Research/Renew_Holdings_July_2009.pdf

I have held shares in this company for some time - but sold a significant proportion when the interims referenced in the header above were released, unveiling a big fall in earnings. My intention had been to buy back in when some signs of recovery were evident, however, I was tempted to dip a toe back in as the SP continued to decline and did so @ 27.5p recently. The subsequent announcement of the nuclear contract win and now Hardman's forecasts appear satisfactory, in that context. The prospect of a 10% dividend, whilst waiting for recovery, is attractive.

Regards,

Mark

muckshifter

Marben,

The "better margins" on their specialist work are generally earned because the work is much higher risk than conventional contracting. One badly estimated remediation contract, for example, could probably wipe out the company. Having said that, I haven't looked at what they do lately, but I know they used to own VHE for example in my field of work. In years gone by it was mostly possible for contractors to survive a seriously bad job by putting a large "claim" value into the accounts as work in progress. Very large claims often took years to settle, and by the time the company had to admit that it was writing down a huge "wip" value, the cash from perhaps a couple of years of more careful contracting would have eased the blow.

So I would watch the cash, bearing in mind that banks are extremely intolerant of contractors in hard times, and I can assure you these are very hard times for us.

Regards

Thanks muckshifter - much appreciated. Yes, they still own VHE. Other "specialist engineering" subsidiaries are:

Shepley Engineers (nuclear remediation)
Seymour (water) [incorporating C&A pumps]
YJL Infrastructure (rail)

Their "specialist building" subsidiaries are:

Allenbuild
Britannia
Walter Lilly

[Allenbuild, together with 111 other construction companies is the subject of an OFT inquiry into infringement of competition law but none of the present management team were with the company at the time of the alleged offence, according to Hardman.]

I was a bit concerned about the generally tight margins in the sector and project risk and quizzed their chief exec, Brian May, about it at the last AGM. I was reasonably satisfied with his responses which boiled down to tight oversight of major bids & projects [but, as you point out, this is an intrinsic risk, which is everpresent]. I felt that he and Renew's chairman, Roy Harrison, had their heads screwed on - and were of sound, "down to earth" northern stock. ;0)

Any insight you may have into these companies or people would be warmly welcome.

Best regards,

PS - fancy digging a ginourmous hole in Namibia? ;0)

30th Jul '09

As this is a good site which needs more posts and posters, I will tell you why I’m vaguely negative on Renew. This is all from distant memory, so it may be utter drivel.

Quite a few years ago I bought Montpellier shares, after that Swedish? bloke bought out elements of YJ Lovell when it effectively went bang, IIRC. (Morgan Sindall which I also held in those days bought out the YJ Lovell Social housing side at that time IIRC) Can’t remember what prompted me to buy, but I was very much aware of VHE’s situation at that time, so it may have been to do with them. Didn’t hold the shares for long – probably less than a year, and sold at a reasonable profit, probably because I didn’t like the never ending stream of purchases of regional building companies, but I can't remember really.

Since then, I’ve thought about them a few times but never bought. The huge building side put me off, particularly when they bought Allenbuild from that company which then turned itself into a plant hire company. Although I’ve never been involved in building, passing a few Allenbuild sites which looked more chaotic than normal sites perhaps influenced me. The VHE side was / perhaps still is, high risk IMHO, which made the whole company vulnerable when they didn’t have much cash. The nuclear clean up side is one that I don’t know about, but I expect it’s the jewel in the crown as I had mates who did highly profitable civils work in Winscale / Sellafield (or whatever they are calling it now – the name is changed each time there is a serious leak of radioactive material).

The other thing is more intangible. I invested very profitably in Laing at the start of the PFI era, but sold out after a couple of years because I could see they were heading for a fall. Laing were the civil engineering equivalent of Barings at that time ie. they had arguably the highest reputation in the UK civils field, but became complacent (IMHO) and took risks inappropriate to the new forms of contract they were entering. I actually wrote a post on TMF at the time explaining this, and predicting that Laing would end up paying someone to take their contracting side away, which is exactly what happened perhaps a year later. (I bought back into the “new Laing” a year ish later and again did very well with them – again explaining my reasoning in a long TMF post) But to get back to the point, one of the senior people who left Laing during their disaster period was, IIRC, Brian May. He may not have been in any way responsible for their demise, and it is not my intention to denigrate his reputation in any way, but, again from memory, I believe he went on to one of the Dutch Civils groups UK subsidiaries, HBG, Volker, or similar, which was at that time in trouble, but didn’t last long or achieve much. I believe he then ended up in Mowlem, a company where I used to know several of the civils directors, but they had mostly gone by that time. My impression is that he didn’t have a senior enough position there to carry the can for Mowlem’s subsequent downfall, particularly because my brother in Oz was telling me of their Australian disasters at the time, but again it’s not really something you would want on your CV.

So there are two ways of looking at this point. He may or may not have had a hand in the downfall of his previous companies. He may have just been unlucky, a dam good bloke, and learned lots from the experience. I think the reason that I find this a negative is more to do with my prejudice against the sort of drivel posted on another site which begins with A.., than reasoned research, and I therefore apologise to Brian May if he happens to read this post. The “other” site had loads of drivel proclaiming him as the Messiah, with fantastic experience and qualities who would do wonders for Renew, written by people who could probably write all the facts they knew about the situation on the back of a postage stamp.

Anyway, this post is now long enough. All I would say is look carefully at the AR, taking particular notice of work in progress and the age of unpaid accounts. If there is a huge increase in “aged” accounts beware. But I’m not an accountant, so as with the rest of this post, I may be talking out of the wrong orifice.

Regards.

PS. A mate of mine is AFAIAA digging just such a hole in Saudi at this very moment!

Once again, thanks - much appreciated. Just for confirmation/clarification: the Hardman note states that Brian May was Chief Executive at Laing prior to 2001.

I guess we'll find out in the fullness of time whether he's learnt from his previous experience... I will monitor the cash/debtors situation carefully.

23rd Sep '09

Since July, I've been meaning to post something here, but haven't got round to it. Isn't laziness a terrible impediment!

The point I intended to make was that after our "discussion" I had a look at the VHE website, and was impressed by what I saw. It had been apparent over the years that VHE were gaining ground in a main contractor role, as opposed to being a subcontractor, but I hadn't realised how well they had done in this respect.

If this is Brian May's work I'm impressed.

24th Nov '09

Hmm, after our earlier discussions I was watching out for these results Marben, but I don't think they are very good, do you?

Incidentally, a question that kept coming to mind reading the interims this morning, was what is the state of play with the numerous framework agreements they have, particularly when I read things like "underpinned by four frameworks with Sellafield, all of which have been extended this year" - does that mean renewed for a further 5 year term or "extended" for a year? If you know off hand it would be good to know, but if you don't, don't spend time looking, I'll have to do it for myself.

The other thing with frameworks, is how many are coming to the start of a new five year spending term, as these are notorious for underspending in year 1, at least in the ones I've experience of.
Regards.

Hi muckshifter,

Sorry for my tardy response. I've been a bit preoccupied with my mining investments today. Renew is quite minor in my portfolio.

I must admit, my initial thought on the results was "not bad". I guess one's view will be coloured by the extent to which one believes the exceptionals are "one offs" or whether they're likely to be repeated. I like the shift to higher-margin "specilaist engineering", which appears to me to be execution of previously announced strategy.

Now, you made a sagacious suggestion previously:

All I would say is look carefully at the AR, taking particular notice of work in progress and the age of unpaid accounts. If there is a huge increase in “aged” accounts beware. But I’m not an accountant, so as with the rest of this post, I may be talking out of the wrong orifice.

Of course, we haven't got the full AR yet, but let me see what analysis I can do with what we have. WIP and debtors should be within "trade receivables". By my reckoning, "debtor days" this year are 77 vs 82 last year - so that's an improvement. No obvious sign of bad debt building up or WIP being overassessed. OTOH cash has dropped a lot, from £28.3m to £14.9m, which isn't such a good sign. Looking at the big drop in "payables", I guess this is due to unwinding of advance payments relating to contracts that are running-off.

The order book is only down by about 10% from a year ago and we now have a slimmed down business.

I'm afraid I don't know the durations of the framework agreements, so that's something I'd have to enquire about. At the least the Board seems well aware of the issues that concern you:

Our emphasis will remain on project selectivity to reduce contract risk and to maintain quality of earnings.

WIP and debtors should be within "trade receivables".

Actually, that's wrong, of course. WIP would be under payables rather than receivables - but that is also down, as I mentioned.

Cheers,

9th Dec '09

I see that Hardman have a note out on Renew, post-results: http://www.hardmanandco.com/Research/Renew_Holdings_November_2009.pdf

4th Jan '10

The 2009 AR is now available on Renew's website: http://www.renewholdings.co.uk/pdf/ar2009.pdf

Note 15 to the accounts (p55) confirms that accruals and deferred income has declined from £65.4m in 2008 to £54.5m in 2009, consistent with my interpretation of the prelim. figures.

Renew General Discussion

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Marben100

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