Renewi: Exit From Canada Announced
Edison | Jun 19, 2019 07:11AM ET
Selling the Canadian Municipal operations is consistent with Renewi PLC (LON:RWI)’s strategy of simplifying its business portfolio and deleveraging the balance sheet. The completion of this transaction and possibly one other that has been flagged will allow investors to focus on the company’s positions, operational improvements and growth aspirations for its core markets. Progress here is likely to be reflected in a re-rating in our view.
Bringing greater focus on core operations
The prospective disposal of the Canada Municipal operations was referenced by management at the end of FY19. The 17 June announcement represents a swift crystallisation of this intention with the proposed sale to Convent Capital, subject to change of control approval from the customer base. This move provides a clean exit from Canada (where the former Shanks Group had operated since 2007) and the Municipal division now solely comprises UK operations. (Note that this was already effectively the case in our estimates given that Canada was classified as discontinued with the FY19 results.) Separately, we assume that other discussions are still progressing with regard to Reym (part of the Hazardous Waste division), although no further update was provided on this.
Favourable leverage effect
Subject to expected completion by the end of September, the terms include initial consideration of c €56m in cash (and we believe that c €4m finance leases are also attached to the operations). On this basis, Renewi flags an associated disposal loss of c €12m; this could effectively be offset by potential deferred consideration and other recoveries of the same amount, which are substantially dependent on the new owner securing additional project financing. Allowing for a small capex reduction also, our end-FY20 core net debt projection (excluding deferred receipts) is now c €527m, equivalent to c 3x EBITDA in the year. The transaction brings a small benefit to earnings estimates via a reduced P&L net interest charge
Valuation: Newsflow driving upside
Renewi’s share price has rallied well from the lows seen in March and is marginally ahead ytd, although it is some way from levels seen a year ago. Incorporating modestly higher earnings estimates, Renewi’s P/E rating is at similar levels to our post-FY19 results note at 8.6x, while the EV/EBITDA (adjusted for pensions cash) has reduced to 5.0x. The initial share price response to the disposal announcement was favourable; successfully concluding this disposal and that of Reym, together with robust trading newsflow, should support further improvement in the share price in our view.
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Business description
Renewi is a waste-to-product company with operations primarily in the Netherlands, Belgium and the UK and was formed from the merger between Shanks Group and Van Gansewinkel Group in 2017. Its activities span the collection, processing and resale of industrial, hazardous and municipal waste.
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