Stock Brief - Renewi (LON:RWI)

14th Jan '22 by Jack Brumby

10 comments 3927 reads

With sustainability firmly on the global agenda, companies of all stripes are being forced to innovate and modify their operations in order to stay on the right side of legislation and public sentiment. There has never been so much raw material extraction, product manufacture, consumption, and waste as there is today.

In steps Renewi (LON:RWI) . A company that has been operating for more than a century but finds itself in demand more now than ever before. Recognised as a waste-to-product leader in sustainability and circular economies, Renewi is well placed to advise and help enterprises in their drive towards more sustainable operations.

Its central purpose is hard to fault: ‘to protect the world by giving new life to used materials’.

As societies impose more environmental responsibility upon corporations, those companies are beginning to accept that they must be more economical with the finite resources at their disposal. Businesses across Europe are exploring sustainability, driven by legislation (such as the Circular Economy Package) and social pressures.

This will continue, and it is with the help of companies such as Renewi that tangible progress might be made. So it looks like the group’s longer term prospects are promising. Meanwhile, shorter term recyclate pricing tailwinds have led brokers to increase FY22 EPS forecasts by 15%.

The StockRanks are strong and Renewi is one of the highest Value-Momentum stocks on the UK market but, having already rerated substantially, are shares now up with events?

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What are the company's principal business activities, how does it generate its revenues?

Renewi is a pure play recycling company exclusively focused on extracting value from waste, rather than disposal through incineration or landfill. Revenues are generated from collecting and processing waste and by selling the recyclates and energy produced.

It is committed to turning residual materials into raw materials and secondary products, and continues to invest in new technologies to facilitate this. The focus on recycling makes it more appealing to companies looking to improve their environmental credentials compared to other waste disposal outfits that typically incinerate the bulk of their materials.

This positioning puts it at the heart of the push for ‘circular economies’ that operate more efficiently, a trend driven by both legislative initiatives and public sentiment.

The group says it is the Benelux market leader, with a presence in the more…

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Lucky dip

14th Jan '22

Excellent article.

Renewi has been on my watch list since it went up by 10% on result day in early November. I still yet to commit to buying and your note is very helpful.

Doug2b

Renewi - cash generative and growth prospects. Not words which sit well for a business which has shed an average of over £46m in net tangible assets per annum, each year over the past 4 years. i.e. Renewi sheds tangible wealth at the rate of c8% of its MCap each year on average. I had to go through this a couple of times, I kept thinking I had placed a decimal incorrectly, this business is holed below the waterline.

The idea that they think that they can acquire another buisiness is a standing joke. Perhaps they are looking for a very small acqusition as a smoke screen for a very large share issuing to buy them some time, to keep the directors and their salaries in place for a few more years. They certainly need to do something drastic.

Renewi are not asset rich by the way. Their net total assets is just 243m, deduct the intangibles and the net tangibles are minus (359)m and fallling fast, year on year!

This shows how dangerous metrics like cash flow and growth prospects can be when they are assessed in islolation from the underlying balance sheet story. Huge debt, rapidly declining tangible balance sheet strength, Renewi is heading into the abyss!

I did work in this sector for many years as part of a LAWDC (local authority waste disposal company), a privatised County Council waste operation, which in the case of my employer remained 100% Council owned indefinitely. We had dealings with Shanks, as they were then and Shanks & McEwan as they were originally. The problem for a business like Renewi is that a lot of what they do is regulatory controlled. They may comply, I am sure that they likely do, but the sector is filled with smaller rogue operators who are given an easy ride by the enforcement agency who get more cudos from giving larger and more compliant operators a hard time, allowong the many rogue operators to run rings around the rules.

The likes of Renewi will always focus on large customers who want to be seen to do things properly, so as to try to bypass the rogue operator effect, but ultimately the playing field is not tilted in their favour and it is clearly is not working for Renewi.

brianm

15th Jan '22

The Corporate Bond market is giving them a large thumbs up, and sees little risk of them going bust. Their "green bond" issues have got away at 3.5% or less.

And you would ignore the fact that Renewi erodes its tangible wealth at an average rate of c8% pa, that is an issue that you are happy to overlook is it! If a business cannot ultimately create tangible wealth for its shareholders, then what is its purpose.

BnB

I have to agree Renewi is not an immediately appealing prospect. I like the ”circular economy” theme very much and I own Veolia (global recycling giant) and Tomra (Norwegian sorting and reverse vending technologies). There is a terrific long term opportunity driven by regulation and ESG in this area and Renewi is well placed. However I think the big gains have already been made and there is more choice on other exchanges.

doctor dave

Well, quite a scary review.

I have done very well with Renewi, and I am happy to see it as a Super Stock, but the minus £366M net tangible asset value and financial distress indicators are pretty frightening.

Odd that it can command Super Stock status with such alarming financial ill health!!

I’m sticking with it for now but watching carefully for signs of weakness, despite the fashionable ESG profile.

16th Jan '22

Worth having a look at some of the big mining stocks at the moment. See comment on BHP from elsewhere. If a business with a 'swiss cheese' balance sheet like Renewi can classify as a super stock, then perhaps BHP could be a supa dupa stock or maybe even a yabadabadoo stock!

Bogdan Branislov

You know that I like to assess the tangible surplus (TS) as a % of MCap - TS is the sum of the average tangible equity growth and the yield, expressed as a % of current MCap.

BHP - for the last 4 years BHP's tangible equity has been largely flat. Big mining work with very long term trends, so worth looking at the longer term data. The 9 year data suggests just over c2% annual net tangible equity growth on average. Share buy backs are c1% pa. Add this to the very large current dividend and the TS is c10% when assessing tangible equity growth over the past 4 years with the divi, extend that to 9 years and the TS figure rises to c12%.

Very hard to argue with that. Investors in the FAAAMs will enjoy a measly TS of around 2% to 2.5% typically. Work on 5% to 6% as a fair price. Then clearly under 5% is over priced and c10% or higher suggests a very clear bargain.

Obviously commodity prices going forward will have a big impact and they are notoriously hard to predict. I don't currently hold BHP, but looking at this, it is very hard to argue with the buy case here, impossible to argue with it in fact.

AlexB1966

17th Jan '22

Renewi (LON:RWI) is in a growth industry and building experience across multiple markets. Last year at £1.80 the shares were a steal. I bought in at £4.00 (equivalent before stock consolidation) on a 8xPE. It still looks like a cheap way into sustainability and the investments they are making should translate into €20mm extra each of the next 4 years. The CFO is leaving but not for reasons of concern. I think it is still a great buy and am holding for now.

khmkii

20th Jan '22

How are you defining tangible wealth?

Majestic Cedar

15th Oct '22

I’m currently alarmed at RENEWIs free fall, and like your comments made in Jan 2022, feel the business model makes sense. May I ask if you are still holding as I am guilty of holding onto a share my brain is saying sell! Thank you

Stock Brief - Renewi (LON:RWI)

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Jack Brumby

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