Shares for the future: analysing a new company for my top 40

Today I am scoring Renew Holdings (LSE:RNWH) for the first time. Not only is the company new to me, but it is in an unfamiliar sector, so the score is provisional.

There is a general perception that our infrastructure is falling apart, which probably means lots of repair and maintenance work. Renew seems to have found a way of making good profits from it.

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Renew is an engineering contractor. It mends and maintains UK infrastructure: railways, roads, water, and nuclear power.

Scoring Renew: repairing our infrastructure

Renew came to my attention because it has a distinguished record of profitability and growth. The only pink flags in the numbers are a sizable increase in the share count in 2018 and 2019 and a typical post-tax profit margin (return on sales in the table below) of only 5%.

The profit margin has been remarkably stable though, given recent materials and labour cost inflation. Repair and maintenance contracts tend to be short-term in nature, giving the company the ability to adjust pricing.

The Past (dependable) [3]

• Profitable growth: Double-digit profit and revenue growth [1]
• Strong finances: No bank debt at year end, modest lease obligations [1]
• Through thick and thin: Lowest ROTIC 13% (2020) [1]

Renew is highly profitable. It earned a 19% Return on Total Invested Capital (ROTIC) in 2024, 3% above the five-year average.

I have chosen to focus on ROTIC rather than Return on Operating Capital (ROC), because the ratio includes the cost of acquisitions. Renew has spent a large portion of free cash flow on acquisitions over the years, suggesting much of its growth has been acquisitive, and its strategy requires it to go on acquiring more businesses.

I have averaged the figures over just five years because I am not very confident in their comparability before then.

One of the surprising things about Renew, and one of the reasons it is so profitable, is it employs very little tangible capital (property and plant) and much of that capital is in the form of leased assets.

This makes the calculation of ratios like debt to capital and ROC very sensitive to operating lease accounting, which changed in 2020 when companies were required to recognise them as a form of debt. Before 2019, we must adjust the figures ourselves, and my way is fairly rudimentary.

2019 is also the year after Renew changed shape. In 2018 it divested itself of Forefront, a failed acquisition in a new sector - gas infrastructure and mains installation. By acquiring QTX, still its biggest acquisition, the company doubled down on its biggest market - Rail.

The QTS acquisition explains the increase in Renew’s share count. To fund it, the company issued more shares.

Renew usually issues a trading statement for the first half of its financial year in April. The mood music at January’s Annual General Meeting (AGM) was positive.

The Present (distinctive) [3]

• Discernible business: Focus on non-discretionary maintenance and repair [1]
• With experienced people: CEO Paul Scott has 22 years of service [1]
• That creates value for customers: Expert provision of services [1]

QTS gives us a flavour of what Renew does. It pins soil and rocks to embankments to stop them falling on railway lines, it manages vegetation, puts up fences, rents out specialist plant, clears and maintains drains, and trains the engineers of other companies.

Most of Renew's businesses have similar capabilities. In nuclear, it works on decontamination and decommissioning programmes.

Perhaps the key attraction is these things must be done if the economy is to work, even if the government and private companies are short of money. In difficult economic times, maintenance and repair becomes a priority over new infrastructure (like the cancelled HS2 project).

It is labour, rather than capital-intensive business. Renew makes much of its directly employed workforce, which means expertise is trained and retained in-house.

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In the Annual Report and Accounts 2023, Renew said it employs 4,361 people and its claim that they are well trained and well remunerated seems credible.

The company’s education programmes resulted in 22,665 days of training in 2023, more than five for each employee. Median pay is about £38,000, which is a price worth paying to avoid volatility in subcontractor pricing. Renew regards its specialist workforce as a competitive advantage.

Recent acquisitions show the company’s strategic direction. Barring the failed foray into gas and the acquisition of Clarke Telecom, Renew has focused investment on the rail, water, road and nuclear markets.

Some of the acquisitions have been bundled up with other companies in the group (its most recent, TIS, was acquired by Shepley, Renew’s existing nuclear subsidiary, for example, and AMCO and Giffen are AmcoGiffen now), but each subsidiary is allowed to operate autonomously under a common set of standards.

Renew’s recent acquisitions

Less than 10% of revenue and only 2% of adjusted operating profit comes from specialist building, a long-established business called Walter Lilly which refurbishes posh residential and culturally important buildings, and builds scientific facilities. It has a different business model that relies on subcontractors, and it earns lower profit margins than the much larger engineering services business.

Unfortunately, Renew does not disclose how much it earns from each engineering services market, but it surely earns most from Rail, historically the largest and the focus of its biggest acquisition. That implies National Rail, described in the annual report as a significant customer, is also its biggest customer, responsible for 43% of revenue. Other customers, like water companies, are big too but none of them bring in more than 10% of revenue.

Paul Scott, CEO since 2016, has sharpened the focus on engineering services. An engineer with 22 years’ service under his belt, he oversaw the disposal of Forefront, the gas company, so he knows what a bad acquisition looks like.

He has also presided over a number of acquisitions, and so far they have performed well.

The Future (directed) [2]

• Addressing challenges:Large customers, and projects [0.5]
• With coherent actions: Diversification through acquisition [0.5]
• That reward all stakeholders fairly: Trained and motivated workforce [1]

The loss of a large customer is a risk, but in mitigation Renew is contracted under long-term “framework” agreements. This means it is a pre-approved supplier, which makes it easy for Renew to win new business and give the company the opportunity to develop strong customer relationships.

This is achieved through innovative and well-paid employees. The 2023 annual report highlights Renew’s bespoke road rail plant (which can be driven on road and rail) for working on the railways, and SafetyCam, a safety system that protects road workers from dangerous drivers.

Acquisitive growth in other important markets like Water and Road also reduces large customer risk. Growth in all markets allows it to extend its reach regionally and gives Renew more capabilities to offer customers.

The acquisition of REL in 2021 added rail electrification to the range of services Renew offers, and enabled QTS, the company it folded REL into, and AmcoGiffen to win the Wales & Western Electrification and Plant frameworks. In 2023, AmcoGiffen and Carnell (AGC) together completed their first major National Highways barrier scheme, making AGC the second largest supplier of road restraint systems in the UK.

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These examples show the group can be more than the sum of its parts.

Renew also has a role in decarbonising the economy.

The electrification opportunity is significant because National Rail needs to electrify 13,000 single track kilometres if it is to decarbonise the railways by 2050. Though small, the acquisition of TIS doubles Renews nuclear manufacturing capability, potentially positioning it to work on new nuclear facilities.

Acquisitions can also be risky, especially if they are substantial. The company’s returns from its acquired businesses have been good though. Although it has tapped investors once for money in the past, its policy is to redeploy internally generated cash flows and pay down debt quickly post acquisitions.

Maybe this means it will live within its means in future.

The price (discounted?) [-1]

• No. A share price of 928p values the enterprise at about £735 million, 23 times normalised profit.

A score of 7 out of 10 indicates that Renew is probably a good long-term investment.

I like it but I am not planning to include it in the Decision Engine immediately. It is a candidate for inclusion, should I decide to remove one of the existing 40 members.

Were Renew included today, it would be ranked 23 (equal with Celebrus Technologies (LSE:CLBS)) out of 40 shares.

23 Shares for the future

Here is the ranked list of Decision Engine shares. I review the scores once a year, soon after each company has published its annual report. The scores change daily due to price changes.

Generally, I consider shares that score 7 or more out of 10 to be good value. Shares that score 5 or 6 out of 10 are probably fairly priced.

Bunzl (LSE:BNZL), Howden Joinery Group (LSE:HWDN), and XP Power Ltd (LSE:XPP) have all published annual reports and are due to be re-scored.

If a share is likely to be downgraded next time I score it, there is a “?” before its name in the table. This is usually because events have revealed something about the company that I had not previously considered adequately.

We will not know for sure until I have scored these companies again, but extra caution may be necessary.

Scores and stats: Richard Beddard. Data: SharePad and annual reports
Shares marked with a question mark are more speculative
Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price).

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.

Richard owns many of the shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher scoring shares.

See our guide to the Decision Engine and the Share Sleuth Portfolio for more information.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard