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Change of focus brings 95% profit boom at engineer
Maintenance work might not be glamorous, but in times of austerity a business whose work comes in regardless of economic conditions stands out from the crowd.
Misunderstood Renew Holdings is widely associated with its 200-year history in construction, but this is misguided as the company is focused on essential maintenance work. It should also benefit as customers cut back on capital spending and instead look after existing infrastructure for longer.
Last month, determined chief executive Brian May, who took the helm in 2005, announced a 95 per cent surge in underlying pre-tax profits to £4.4million for the six months to March 31 and a 40 per cent increase in the engineering services order book to a record £229 million.
The company knows these orders will come in over the coming months and its confidence in the future was highlighted by a five per cent rise in the interim dividend to 1.05p, the first half-year increase since 2008.
May is ambitious for Renew and has set a number of targets for the next two years. He has a clear strategy for growth and the shares are almost certain to respond.
First, he wants to increase turnover from £350million to £500million by 2014 through organic growth and acquisitions. Second, he wants to raise profit margins from 2.5 per cent to more than three per cent. And third, he wants to increase Renew’s focus on engineering services. In 2005, this accounted for 15 per cent of group turnover. Today it accounts for 60 per cent and May intends to boost that to 75 per cent by 2014.
Originally known as YJ Lovell, the company, based in Aberford, West Yorkshire, spent most of the past 200 years in construction, with engineering playing second fiddle.
When May joined and changed the name to Renew, he set out a plan to reduce its dependence on building and increase its engineering presence. A number of strategic acquisitions took place and non-core, unprofitable divisions were sold. Today the company is firmly focused on two solid sectors – specialist building and engineering, particularly the provision of essential maintenance work.
On the building side, Renew has two arms. It is a leading social housing contractor in London and the South-East and, at the other end of the spectrum, a specialist in complex residential building work for multi-million pound houses and flats in central London. Projects include indoor pools and private underground car parks, each requiring top engineering skills as customer expectations are high and neighbours will not put up with too much disruption.
Renew’s technical expertise comes into its own not just in the London property market but in its engineering services business, which covers three main sectors – environmental, infrastructure and energy.
Clients include Sellafield nuclear power station, Network Rail, Northumbrian Water and London Underground.
In each case, Renew is responsible for repairs that simply have to be done, either for regulatory reasons or to keep infrastructure up and running. With Network Rail, for example, it covers every aspect of maintenance except repairing the tracks, from mending bridges and fixing tunnels to removing foliage.
At Sellafield, the group carries out specialised maintenance and decommissioning work, often involving extremely hazardous waste. It also cleans contaminated land for the Environment Agency and it helps to maintain wind farms and power stations for energy companies, such as EDF and SSE.
Engineering contracts tend to last a long time so the company’s prospects can be more easily monitored and the business is generally more profitable than building, so May’s strategy makes sense.
Midas verdict: Many brokers still associate Renew with the construction sector, so it is undervalued by the market. But this should change as May pushes ahead with his growth strategy. At 75p, the shares are a buy.
Traded on: Aim Ticker: RNWH Contact: 0113 281 4200 or renewholdings.com
MIDAS UPDATE – Shares rise 61% since our tip at confident RPC
Plastis business RPC has had an impressive year, integrating a major acquisition, increasing sales and profits, and delivering an upbeat message about future growth.
Midas last looked at the shares in January 2011, when the shares were 236p and the group had just launched a rights issue to finance the takeover of a rival. Today the shares are 380p and should continue to shine. RPC originally stood for rigid plastic containers and that is more or less what the company makes. Products range from olive oil bottles to petrol cans and face cream pots.
The group has factories in 18 countries and supplies multinational corporations such as Unilever and L’Oreal, as well as smaller local businesses. In each case however, RPC tries to forge long-term relationships with customers by supplying them with high-quality, innovative products, such as paint containers that look like traditional metal ones but are made of plastic or particularly resilient bottles and jars.
In February 2011, RPC acquired rival container maker Superfos and last week the enlarged business announced a 68 per cent increase in underlying profits to £93.5million and a 25 per cent hike in the dividend to 14.4p for the 12 months to March 2012.
Chief executive Ron Marsh admits conditions are tough, particularly in Europe, but he is confident about the future because RPC is reaping benefits from the Superfos deal, many of the group’s products are used for food and healthcare goods and lastly there is a growing move towards the use of plastic instead of heavier materials such as glass and metal.
Midas verdict: Investors have done well out of RPC and may be tempted to dispose of shares and bank some profit.
Selling a few is not a bad idea after the recent strong run, but investors should retain at least half of their holding.
This business is likely to prosper further, the dividend should continue to rise and the shares seem set for more growth.
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