Small Cap Value Report (1 Oct 2015) - RNWH, DAN

Thursday, Oct 01 2015 by
36

Good morning!

It's a quiet day for news today, which is handy as I have a lunch appointment with some investor friends, so just a brief report today.


RNWH

Share price: 330p (up 1.4% today)
No. shares: 61.5m
Market cap: £ 203.0 m

Trading update - a reassuring update today:

The Board expects the Group's results for the year to 30 September 2015 to be in line with market expectations with growth in both revenue and operating profit continuing in the second half.
Cash generation continues to be good resulting in a further reduction in net debt.

The valuation looks reasonable at first sight, given that this is a low margin contracting business (so won't ever command a premium rating):

560cf42786224RNWH_valuation.PNG

Balance sheet issues - I won't go over all the detail again, but suffice it to say that (for me anyway) this share remains uninvestable, due to it having an extremely weak balance sheet.

I have highlighted above the "Price to Tang. Book" line on the StockReport. This is a very quick way to check if the balance sheet is weak - if this line says "n/a", then that means that the company has negative net tangible assets, as in this case. So when looking at companies, I always glance at this line, as "n/a" is a red flag for me, meaning that more work is needed to check out the balance sheet.

The last reported balance sheet showed a deficit on NTAV of £40.2m, clearly a very weak position.

My opinion - the business is financed by customer deposits, and money owed to subcontractors, so there is a lot of hidden debt, over and above the bank debt. If you ignore this issue, then you're paying too much for the shares, simple as that.

On the positive side, the business seems to be trading well, and has delivered a much improved performance in recent years, growing its operating margin, winning good business from the rail sector in particular, and adding bolt-on acquisitions.

Although when you look at the individual subsidiary accounts, they're really very ordinary businesses, so packaging them together doesn't really add any value. Would you pay a PER of 12 for any of them individually? I very much doubt it. So it's difficult to see why a group of unexciting companies put together should command a PER of 12.

Acquisitions can however create the illusion of growth, although that comes…

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Renew Holdings plc operates as a contractor in engineering services and specialist building. The Company's activities are carried out in the United Kingdom with some development activities in the United States. The Company's segments include Engineering Services, which comprises the engineering activities, which are characterized by the use of the Company's engineering workforce, supplemented by specialist subcontractors where appropriate, in a range of civil, mechanical and electrical engineering applications and; Specialist Building, which comprises the building activities, which are characterized by the use of a supply chain of subcontractors to carry out building works under the control of the Company as principal contractor, and Central activities, which include the sale of land for development, the leasing and sub-leasing of some United Kingdom properties and the provision of central services to the operating subsidiaries. more »

LSE Price
400p
Change
 
Mkt Cap (£m)
301.3
P/E (fwd)
9.9
Yield (fwd)
2.9




  Is LON:RNWH fundamentally strong or weak? Find out More »


2 Comments on this Article show/hide all

Mark Carter 1st Oct '15 1 of 2
2

Daniel Stewart Securities (LON:DAN): "The company says that a refinancing package is imminent"

I sure hope not! This company needs to be flushed down the toilet together with the rest of the, um, effluent.

Who knows what Rob Terry had planned for this outfit? I dare say he'll come up smelling of roses whatever happens.

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martinmullane 2nd Oct '15 2 of 2

Hi Paul,
I always look forward to your daily report.
You often refer to Balance Sheet strength & your 3 key Metrics for the Balance Sheet.
What exactly are they?
Thanks

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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