Focusing On Engineering Services Will Capitalize On Expanding Onshore Wind Markets

Key Takeaways

• Strategic focus on engineering services and expansion into new markets enhances revenue growth opportunities in onshore wind and transmission sectors.
  
• Robust M&A strategy and operational improvements position Renew Holdings for increased profitability and enhanced earnings through innovation and efficiency.
  
• Increased corporation tax, debt from acquisitions, integration risks, historical liabilities, and competitive market pressures could strain Renew Holdings' margins and growth.

Catalysts

Provides engineering services in the United Kingdom.

• The disposal of Specialist Building has positioned Renew Holdings as a pure-play engineering services provider, with a focus on areas such as onshore wind and transmission and distribution. This strategic shift is expected to drive revenue growth by tapping into expanding market opportunities in these sectors.
  
• Renew Holdings has demonstrated strong organic growth with record revenues, thanks to a high-quality, low-risk business model that focuses on markets with highly visible, committed funding. This positions the company to potentially improve operating margins and increase profitability.
  
• The company has expanded significantly into new markets, now covering five specific market areas compared to only two in 2015. This massive expansion presents the potential to increase revenue further as they capitalize on the substantial annualized addressable market across these sectors.
  
• Renew Holdings has a robust M&A strategy, as evidenced by recent acquisitions such as Excalon and Full Circle, which deliver immediate earnings enhancements and higher margins. This strategy is expected to boost EPS and support long-term earnings growth.
  
• Renew Holdings' focus on innovation and collaboration, along with a commitment to improve service efficiency, suggests an opportunity for increased net margins through operational improvements and reductions in costs, such as the reduced carbon footprint from the use of StoneMaster technology.

Renew Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Renew Holdings's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 4.5% in 3 years time.
• Analysts expect earnings to reach £55.3 million (and earnings per share of £0.7) by about February 2028, up from £44.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 12.7x today. This future PE is greater than the current PE for the GB Construction industry at 11.7x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Renew Holdings Future Earnings Per Share Growth

Risks

• The increase in corporation tax to 25% starting from April 2023 is expected to impact net margins and potentially reduce net earnings growth, as the full impact of this increased tax rate will be felt in the current year.
  
• The company has moved into a net debt position following the acquisition of Full Circle for just over £50 million, which could impact its ability to invest in future growth opportunities or increase shareholder returns.
  
• The integration and success of recent acquisitions, including Excalon and Full Circle, are uncertain and pose execution risks, potentially affecting revenue and profit if these acquisitions do not perform as expected.
  
• There is increased provision against discontinued historic liabilities in Allenbuild, which rose to £10 million. This could continue to draw cash away from current operations and impact earnings if further issues arise.
  
• The competitive nature of growing market areas such as onshore wind and electricity distribution could pressure operating margins and revenue growth as Renew Holdings competes against larger incumbents and new entrants.

Valuation

• The analysts have a consensus price target of £12.333 for Renew Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.2 billion, earnings will come to £55.3 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of £7.06, the analyst price target of £12.33 is 42.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.