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Questor share tip: Renew on track for the full-year

The smallcap engineering support group has transformed its profits during the past three years, says Questor

WS Atkins the largest engineering group in the UK has been involved in design work for HS2 and Crossrail.
WS Atkins the largest engineering group in the UK has been involved in design work for HS2 and Crossrail. Credit: Photo: UNIVERSAL NEWS AND SPORTS

Renew Holdings
289p-2.5p
Questor says BUY

SHARES of engineering support group Renew Holdings [LON:RNWH] have increased almost 30pc since we said they looked cheap back in April and the company’s confident trading update yesterday means they remain attractive for the long-term investor.

Renew has transformed itself over the past five years. The company has shifted from construction, which was low margin and high risk, to engineering services, which provides a higher profit margin and longer-term contracts.

The company further expanded into the gas industry through the £14.8m acquisition of Forefront in early August. The deal looks sensibly financed with a £12m four-year loan from HSBC. Renew should be able to pay this off as it generates plenty of cash; operating cash continued to be strong in the first half of the year.

This is a deal bearing many similarities to the purchase of Clarke Telecom in April and one that Renew carried out about four years ago when it transformed itself into a specialist engineering support group following the £15m acquisition of Amco. The deal brought national coverage and, perhaps more importantly, higher-margin engineering support work with clients such as Network Rail, British Energy and National Grid.

Engineering services work is more stable as it comes through framework agreements whereby Renew guarantee to carry out small-ticket items, such as clearing sewage blockages or re-laying cables on crucial infrastructure projects - among them the nuclear decommissioning at Sellafield. These contracts have predictable run rates which give Renew good visibility.

Renew said full-year results will be in line with market expectations for pre-tax profit up 40pc to £14.9m, on revenue up 25pc to £439m, giving earnings per share of 18.8p. With some big acquisitions completed during the past 12 months, both revenue and profits are forecast to accelerate again next year

The consensus estimates for the next 12 months are for revenue to increase to £500m, giving pre-tax profits of £19.2m, and earnings per share of 24.3p. The shares trade on a P/E ratio of 15.5 times, falling to 12 times next year. They remain a buy.