Focusing On Core Operations And Leveraging EU Policies Will Fuel Future Success

Key Takeaways

• Strategic divestments and operational improvements are set to boost Renewi's margins and enhance earnings stability.
  
• Legislative support for recycling aligns with Renewi's focus, bolstering competitive strength and future revenue growth.
  
• Various financial challenges, including cost management and divestment impacts, could disrupt Renewi's profit margins, revenue growth, and future investment capacity.

Catalysts

Engages in collecting, sorting, and processing of waste to create secondary materials in the Netherlands, Belgium, the United Kingdom, France, Portugal, and internationally.

• Renewi has completed its portfolio optimization by divesting non-core businesses like the UK municipal division, which derisks the balance sheet and allows focus on higher-margin core operations. This is likely to improve net margins and enhance overall earnings stability.
  
• The turnaround in Mineralz & Water, driven by converting contaminated soil into secondary materials, significantly boosted EBIT margins to 10%. Further refinement in product quality could lead to sustained margin improvements and higher revenues as demand increases from the concrete industry.
  
• Renewi's focus on organic growth through its refreshed commercial strategy, particularly in the Commercial Waste division and partnerships for circular projects, is expected to strengthen revenue growth and market share, potentially increasing the top line and net margins.
  
• The One Renewi program aims to simplify the organizational structure, harmonize processes, and drive a performance culture. This initiative is projected to reduce operational costs by around €40 million, improving net margins and boosting long-term earnings.
  
• Legislative changes in the EU, such as upcoming incineration taxes, the Critical Raw Materials Act, and other pro-recycling policies, are expected to enhance Renewi's competitive position, supporting increased volume growth and higher recycling rates, thus positively impacting future revenue streams and profitability.

Renewi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Renewi's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 5.4% in 3 years time.
• Analysts expect earnings to reach €108.9 million (and earnings per share of €0.86) by about February 2028, up from €30.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, down from 25.6x today. This future PE is lower than the current PE for the GB Commercial Services industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

Renewi Future Earnings Per Share Growth

Risks

• The restructuring and transaction costs associated with previous initiatives and the divestment of the UK municipal business, while now mostly complete, have historically been a drag on profitability and cash flow, which could affect net margins if unexpected issues resurface.
  
• The company's reliance on price increases in waste services to manage cost inflation could lead to potential resistance from customers, impacting market share and ultimately affecting revenue growth if competitors do not follow suit as expected.
  
• The exposure to fluctuating recyclate prices and subdued volumes in some waste divisions could lead to volatility in earnings if these elements do not stabilize, challenging the consistency of revenue and profitability.
  
• The temporary elevation in leverage from funding the UK divestment, with associated higher interest charges, could pressure Renewi's future cash flows and financial flexibility, impacting the company’s ability to invest in growth projects.
  
• The execution risk associated with the One Renewi program and ongoing digital transformation efforts could result in unforeseen implementation costs or slower-than-expected benefits, impacting anticipated improvements in net margins and shareholder returns.

Valuation

• The analysts have a consensus price target of £8.433 for Renewi based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £9.5, and the most bearish reporting a price target of just £7.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €108.9 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £8.06, the analyst price target of £8.43 is 4.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.