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Questor: sales up, profits up, dividend up. Why are Renew’s shares no higher than in 2016?
Questor Income Portfolio: the engineering firm has made a success of a large acquisition and is growing nicely, but the market seems not to have noticed
It is time that we took another look at Renew Holdings, the engineering services company that last year embarked on a significant takeover. We said then that we tended to take a sceptical view of the claimed benefits of large acquisitions and would keep a close eye on progress.
Happily, we can report that the takeover, of a firm called QTS, shows every sign of success.
In its interim report for the six months to the end of March, published in June, the company said it had seen “record trading in the period, in part reflecting the contribution of QTS, which was acquired in May 2018 and is now fully integrated”.
It said the “excellent revenue performance” of its engineering services division, which is the “key driver of growth for the group” and accounts for more than 90pc of its revenue and more than 95pc of operating profits, was a reflection of the impact of QTS.
Numis, the stockbroker, said: “With the full weight of QTS in the first-half numbers, we always expected a strong performance.”
The interim figures were highly encouraging all round. Sales grew by 14.9pc from the same time last year to £301m, while profits before tax on a statutory basis increased sevenfold to £17.7m. Operating profits on an adjusted basis, meanwhile, increased by 39pc to £18.4m.
Adjusted operating profit margins increased by more than a fifth to 6.1pc from 5pc, while adjusted earnings per share were 19.2p, compared with 16.7p last time.
And readers of this column, focused on the income from their shares above all else, will be pleased to hear that the interim dividend was raised by 15pc to 3.83p. In light of this, Numis raised its prediction for the full-year dividend from 10.5p to 11.5p. As last year’s payment was 10p, that would represent an increase of 15pc.
Although it was highly reassuring that all the signs pointed to a successful integration of QTS, “organic” growth from the existing businesses was also strong – organic growth in the key engineering services division was 8pc. Overall the division’s sales growth was 25pc, while its earnings before interest and tax grew by 48pc and its margins (on the same measure of profits) grew by more than a percentage point to 6.8pc.
Key to future growth will be Renew’s rail operations and here too the signs are promising. Network Rail, the body that owns and maintains Britain’s tracks and stations, is entering a new budgetary period and Renew should benefit significantly.
“Management has previously indicated, and reiterates here [in the interim results], that having been appointed across all tendered-for renewals in [the new period] Renew is in a very strong position for an increase of about 25pc in Network Rail operational spending from 2019-20 onwards,” Numis said.
One of the company’s key strengths is that much of the work it carries out for Network Rail and similar infrastructure owners simply has to be carried out, irrespective of factors that can blow other spending plans off course, such as a recession or Brexit.
Renew is not a company where we have to worry about debts. Net borrowing fell by £4.2m compared with the end of the previous financial year and now stands at £17.2m. Numis predicted that the figure would fall further to £10.9m by the end of this year, making it just a fifth of annual profits on the “Ebitda” measure, a level seen as very prudent by analysts.
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Better still, the broker said it expected Renew to move into having net cash next year.
Despite the firm’s progress, its shares stand barely moved from the 392p at which we tipped them in November 2016, although they have been as high as 487p and as low as 333p over the period.
As ever, aversion on the part of investors both domestic and international towards the London stock market in general, and those stocks focused on the British economy in particular, is likely to be the culprit.
Questor says: hold
Ticker: RNWH
Share price at close: 390p
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