Renew Holdings (RNWH.L) presents a compelling investment in UK infrastructure, with its stock recently trading at a discount after a significant drop. The company appears undervalued at less than 10 times operating income, especially given its essential, non-discretionary engineering services in the Rail, Energy, and Infrastructure sectors. RNWH.L is well-positioned to capitalize on the UK's planned £725 billion infrastructure spending over the next decade. A conservative growth scenario suggests a potential 14% annual return over three years if the stock re-rates to an 18x earnings multiple. While recent project delays have created short-term headwinds, they may also offer an attractive entry point for long-term investors.

Renew Holdings (RNWH.L)

• Business Overview: A UK small-cap company that provides essential engineering services to maintain and renew the UK's aging infrastructure. The speaker notes they have recently purchased shares in the company.
• Share Price Performance: Shares were down 23% over the past year at the time of the recording.
• Key Financials:
  • Market Cap: £657 million
  • Enterprise Value: £668 million (£8M cash, £20M debt)
  • Revenue (TTM): £1.1 billion
  • Net Income (TTM): £45 million
  • EBITDA (TTM): £83 million
  • Free Cash Flow (TTM): £39 million
• Valuation Multiples:
  • Price-to-Earnings (P/E): 15x
  • EV-to-EBITDA: 8x
  • Price-to-Free Cash Flow: 17x
  • The speaker also notes it trades at less than 10x operating income.
• Bullish Case:
  • Non-Discretionary Services: The company operates in four key segments: Rail, Infrastructure, Energy, and Environmental, which are considered mission-critical.
  • Large Market: The total addressable market is £33 billion, significantly larger than the company's current revenue.
  • Government Support: The business is supported by the UK government's commitment to spend £725 billion on infrastructure over the next decade, including new projects like wind farms and nuclear power.
  • Strong Track Record:
    • Revenue has grown at 8% per year for the last 10 years.
    • Net income has grown at 23% per year over the same period.
    • Reports an impressive 27% average return on capital employed.
  • Future Growth:
    • The order backlog is at a record £908 million.
    • A recent acquisition indicates a potential expansion into Europe.
    • The company has low debt and strong free cash flow, providing "firepower" for future acquisitions.
• Risk Factors:
  • Government Finances: The primary concern is the "unstable finances of the UK government."
  • Project Delays: The stock recently fell 22% in January due to news of delays and deferments from Network Rail. This is expected to impact short-term revenue and margins.
  • Management Outlook: Despite the delays, management expects full-year operating profit to be higher than the previous year.

Takeaways

• Potential Undervaluation: The speaker believes the stock seems "too cheap" at less than 10x operating income, given its defensive business model and historical ability to grow earnings.
• Long-Term Growth Story: The company is positioned to benefit from a decade-long government infrastructure spending cycle. Its successful acquisition strategy and strong financial position could fuel further growth.
• Valuation Scenario: A specific scenario was mentioned: if net income grows at half its historical rate (around 11.5%) for three years and is valued at an 18x earnings multiple, the company could be worth over £1 billion. This would represent a potential investment return of 14% per year.
• Short-Term Headwinds: Investors should be aware of the risks related to UK government spending and project delays, which have recently impacted the share price and could affect near-term results.
• Disclosure: The speaker notes that these are their personal opinions and that they own shares in Renew Holdings.