Renewi exits tricky UK waste business

Recycling specialist Renewi (RWI) wants to focus on what it does best – extracting value from waste in the Benelux region. This is why it has offloaded its non-core municipal waste operations in the UK. The group announced the divestment of its “five highly bespoke legacy contracts” on the day of its full-year results, sending its shares up more than 1.5 per cent by midday. None of the contracts were profitable, nor could they be terminated or renegotiated. 

Biffa has agreed to buy the division, though not before Renewi has put up £125mn to ensure it’s adequately capitalised for the future. The deal will be funded via the company’s existing revolving credit facility and is expected to be completed by the end of this year. According to the group’s chief executive, Otto de Bont, the initial costs of the divestment are far outweighed by the balance sheet benefits.

“The impact of this transaction is that we’re increasing our free cash flow by €15-20mn, simply because we will not have the cash outflow anymore to subsidise these contracts,” he said. “By taking away about €180mn of revenue from the UK municipal business, at basically no margin, we will increase our trading margin by 50 basis points from day one.”

Revenue from Renewi’s continuing operations saw a slight dip across FY2024 because of slow economic growth and a reduction in recyclate prices. The group was particularly impacted by lower levels of construction and demolition activities in the Netherlands, its home market. This explains why underlying Ebit was down 20 per cent. 

Overall volumes were also down year-on-year, though they stabilised during the second half – as did recyclate prices. Management now expects the business to return to revenue growth and margin improvement in FY2025. Leverage is expected to increase to 2.9 times in the immediate aftermath of the UK divestment, though it should fall back to the group’s target of 2.0 times in the medium term.

FactSet broker consensus puts the shares at an undemanding price-to-earnings ratio of 10.1 times for the current financial year. We think that’s a reasonable price to pay for a company in a long-term growth sector (which is admittedly enduring some short-term challenges). The imperative to reduce waste and increase recycling isn’t going anywhere, especially not in the markets Renewi operates in. Buy.

Last IC view: Buy, 704p, 28 September 2023