Stock Brief - Renewi (LON:RWI)
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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?
Profile
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 fragmented UK market. It also operates in France, Portugal, and Hungary.
In terms of operations, Renewi has over 6,500 employees at 165 sites in six countries, working across three customer-facing divisions:
- Commercial Waste - market leader in the Netherlands and Belgium, providing a wide range of solutions and representing around 72% of group revenue. The commercial waste market covers the collection, sorting, and processing of waste materials from a range of sources.
- Mineralz & Water - consists of ATM and Mineralz businesses. Activities centre around decontamination, stabilisation, and reuse of highly contaminated materials including soil, sludge, water, bottom and fly ash, and packed chemical waste. It produces certified secondary raw materials for the construction industry.
- Specialities - three businesses: Coolrec, Maltha, and Municipal. Focused on processing of specific waste streams: waste from electrical and electronic equipment (Coolrec), glass (Maltha), and residual municipal waste.
More specifically, activities include:
- The collection of waste with its fleet of zero and low-emission trucks,
- The use of technology such as optical sorting lines to segregate specific recycling materials for further use,
- Separation of recyclates from burnable residues that can’t create products, which are sent for energy recovery,
- The refinement of remaining material into highly-specified products for high customer at its specialist facilities,
- The sale of secondary products as inputs into industrial-scale manufacturing, and
- Collaboration with manufacturers to design and source feedstocks to make secondary products.
Size, Sector & Exchange
Renewi has been operating for over a century and listed on the LSE Main Market in 1988, before listing on Euronext Amsterdam in 2020. It is in the Industrials sector and included as part of the Professional & Commercial Services industry group.
It is currently classified as a Speculative Mid Cap Turnaround
Business strategy
The group is positioned higher up the value chain in the segments expected to show structural growth but has recently said its focus is shifting towards downstream in line with market value, from collection to processing.
The group plans to deliver more and higher-quality secondary raw materials and biofuels and is investing in new technology to better enable this.
Renewi launched its current strategy in 2020, led by three pillars:
- Leader in recycling - recycling is central to its waste-to-product mission and also answers market demand. At present, the group recycles around 65% of volumes treated and hopes to grow this to 75%.
- Leader in secondary material production - improving the quality of products increases the value of what Renewi recycles. The group believes that most companies will eventually be prepared to pay a higher price for high-quality secondary raw materials and is already seeing signs of this. It targets 20m euro of additional EBIT from advanced sorting and processing and continues to invest in new treatment technologies.
- Selectively gain market share - grow the total volume of waste treated.
History & Growth
Renewi was formed upon the completion of the merger between Shanks and Van Gansewinkel (VGG) in February 2017.
The years since then have not been plain sailing, however, with exceptional costs and a thermal soil review weighing on the share price.
Recent News
Most recent trading update
Half year report, 9 November 2021
- Revenue +11% to €916m,
- Underlying EBITDA +43% to €126.6m and underlying EBIT +125% to €63.8m,
- Statutory profit up from €3.5m to €37.1m,
- Core net debt reduced to €336m (March 2021: €344m), representing net debt to EBITDA of 1.82x, within our 2x leverage target two years ahead of expectations,
- Management expectations for the full year ending 31 March 2022 further increased.
Our business model is essential to enable advanced circular economies to achieve their carbon reduction targets. By recycling more we reduce incineration and assist our customers in reducing their carbon footprint as they replace virgin materials with our high-quality secondary materials. We therefore expect to see long-term accretive growth opportunities across our markets as we add more value to the waste we collect and process.
The group says it is largely back to pre-Covid pandemic levels of business. Belgium was most impacted and has bounced back significantly. Covid required Renewi to cut some discretionary and variable costs, as well as close down some sites. It has been able to keep some of these cost gains as business recovers.
Recyclates have driven the record performance with prices at multi-year highs, particularly in paper, cardboard, and metal. Some of these benefits are structural - paper and cardboard driven by internet shopping and should be permanent. Metals are coming back down and could continue to moderate.
Capital allocation - net debt target reached two years ahead of target opens up growth investment opportunities.
Catalysts
Trends & Events
Carbon reduction - increasing legislation and targets, including the UN’s Sustainable Development Goals and national government initiatives.
‘The Circularity Gap’ - societies cannot achieve their carbon reduction targets without also very significantly increasing the reuse of materials. Renewi is investing to address these challenges.
The waste market - is in transition and is attempting to shift away from incineration to recycling and production of secondary products. Renewi is a leader here.
Consolidation - the sector in Belgium is seeing a significant amount of M&A activity. Renewi has hinted that it could buy a business.
Risks
What risks does the business face?
Balance sheet - debt is coming down and is now less than 2x EBITDA, but the group’s Z-Score suggests further work can be done.
The score highlights negative retained earnings, a low level of liquid assets as a proportion of total assets, and high levels of gearing.
The group also has more than 600m euros of goodwill and intangibles within its total assets of 2bn euros. When set against total liabilities of 1.7bn euros, Renewi’s net tangible asset value is negative 366m euros.
Long term debt is falling, however.
Liquidity scores are weak.
Track record of net losses - although normalised earnings per share and operating cash flow per share have been positive.
Soil review - concluded in 2019/20, but is a reminder that high regulation markets bring risks as well as barriers to entry.
Summary
Bull points
Cash generative and valued at 6.2x trailing twelve month free cash flow, good stockranks, stable shares in issue, barriers to entry, aligned with long term trends, nearer term growth initiatives, net debt reduction ahead of schedule.
Bear points
Previous share price falls, regulatory risks, net losses and exceptional costs, poor (but improving) financial health.
Renewi has been a bumpy ride over the past five years or so, but previous exceptional costs could be hiding underlying progress. Despite the net losses, the group has remained cash generative, it is aligned with long term growth drivers, and the ahead of schedule net debt reduction frees up capital for growth investments.
While financial health remains a risk, the market could eventually come to change its perception of Renewi and attach more value to the group’s future prospects. A Value Rank of 88 goes some way to justifying a further rerating, assuming ongoing increases in demand for recycled and reusable secondary materials in the years ahead…
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10 comments
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.
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
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.
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.
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.
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.
How are you defining tangible wealth?
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.
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.