An investigation by the independent European Environment Agency (EEA) found the circular material use rate increased just 0.1 percentage points annually between 2011 and 2021. This means that the share of recycled waste used in the European economy must drastically ramp up in the next few years. According to the EEA, special efforts must be made to increase the recycling of non-metallic minerals, such as construction materials, as these make up around half of all materials used in the EU.

The opportunity for companies such as London-listed Renewi (RWI) – a self-styled “waste-to-product” specialist – is clearly significant. While it started life as a construction company in the west of Scotland in the late 19th century, the group now collects various forms of refuse and transforms them into secondary materials. Nearly 60 per cent of its revenue comes from the Netherlands, with a further 29 per cent made in neighbouring Belgium. Local authority contracts in the UK account for most of the balance, although the group has other smaller-scale operations in France and Portugal, and ambitions for further international expansion.

 

 

Trash turned treasure

The group’s commercial waste division, which accounted for nearly three-quarters of sales in the most recent financial year, does what might be thought of as conventional recycling work. This means it collects wastes in a truck for transport to one of 96 sites, where they can be used to produce new materials. However, the list of items Renewi processes extends far beyond the typical soft drink bottles and tin cans. For instance, it partnered with another recycling group in the Netherlands to turn more than 60,000 tonnes of discarded citrus peels into essential oils, cleaning agents and livestock feed. 

The Mineralz & Water (M&W) business deals with far less palatable forms of waste, including contaminated soil, old road surfaces, industrial sludge and other hazardous by-products. Various treatment methods are available to transform these feedstocks into secondary materials for use in the construction sector. This is precisely the kind of work the EEA identified as essential in its circular economy report. But this is also the division that has proved most problematic for investors.

 

 

Problems stem from new Dutch legislation that will restrict the use of thermally cleaned soil (TGG) in infrastructure projects. Renewi was a major producer of TGG at its ATM waste treatment plant and now has some 600,000 tonnes of the treated soil held in a stockpile at the site. The M&W business is instead hoping to focus on processing waste sand from infrastructure projects at ATM into new forms of sand, gravel and filler that can be used by the concrete industry. This will, however, prove difficult unless the TGG stock can be shifted. 

“Without clearing this, import permits for incoming soil will not be granted, and with Netherlands construction in decline, imports will be necessary for the plant to reach full capacity,” explained Peel Hunt analysts in a June note. Underlying operating profit for the division dropped by more than 90 per cent to just €0.5mn (£0.4mn) in the 12 months to March, and the cost of clearing the old soil is now anticipated to be €16mn over the next two years or so. 

 

 

The root issue is that some of the group’s more complex treated wastes, such as TGG, don’t have stable or mature end markets as yet. Materials like this resemble solutions in search of a problem, rather than genuine commodities. Still, the challenges at M&W don’t wholly explain the recent underperformance of Renewi’s shares, which are down 17 per cent in the year to date and two-fifths below their ESG-powered all-time high in late 2021. The wider macroeconomic issues affecting many UK and European industrial companies may come into play here as well.

On an earnings call in May, chief executive Otto de Bont highlighted the significant impact inflation had made on the business. “If you think about employment costs or if you think about energy costs or equipment costs, all saw double-digit increases, which was quite unusual,” he noted. Slowdowns in certain key sectors, such as the Dutch construction industry, meant there were fewer waste streams available for collection and treatment, while last year’s hot and dry summer left the company with less available organic waste in the Netherlands. High energy prices also meant lower activity in the greenhouse market. Signs that some of these pressures are abating are therefore welcome news to investors.

 

Renewed potential

The private buyout and delisting of waste management group Biffa at the start of this year left Renewi with few genuine competitors on the London Stock Exchange. This makes it difficult to measure it against its peers for valuation purposes. Renewi shares trade at just seven times consensus forward earnings estimates for this financial year, which is low by any standard and, as several brokers have noted, out of step with the company’s growth potential. 

Berenberg analysts wrote last month that the company “currently exhibits a depressed valuation, given a combination of legacy issues and concerns about its near-term forecasts due to recent tailwinds from elevated recyclate and commodity prices”. Prices of raw materials, including recycled plastics, skyrocketed as pandemic restrictions loosened and the war in Ukraine began. But those prices had begun to normalise – and even fall – by the end of last year.

As a result, Renewi’s underlying operating profit for FY2023 fell 1 per cent to €133mn – a drop that would have been worse were it not for cost control measures and product price increases. Management now hopes to grow annual revenue to at least €3bn “at high single-digit margins” over the next five years.

Peel Hunt analysts think this seems achievable “and suggests that investors should reappraise Renewi towards growth and away from recovery”. If the company delivers, this should help allay any shareholder concerns with mounting balance sheet leverage, even though core debt (which strips out lease liabilities and non-recourse UK public-private partnership debt) is largely fixed, relatively cheap, long-term in nature, and therefore manageable.

There are currently very few opportunities for UK investors to gain exposure to Europe’s strategically important recycling market. The fact that the bloc is not on track to meet its circular economy targets could, paradoxically, be good news for established players such as Renewi. As member states look to level up their recycling capabilities, they will no doubt turn to existing companies with proven business models for assistance. Renewi’s experience makes it an obvious choice.

Company Details	Name	Mkt Cap	Price	52-Wk Hi/Lo
	Renewi  (RWI)	£399m	498p	853p / 480p
Size/Debt	NAV per share*	Net Cash / Debt(-)*	Net Debt / Ebitda	Op Cash/ Ebitda
	384p	-£586mn	2.0 x	53%

Valuation	Fwd PE (+12mths)	Fwd DY (+12mths)	FCF yld (+12mths)	P/Sales
	7	1.8%	1.2%	0.3
Quality/ Growth	EBIT Margin	ROCE	5yr Sales CAGR	5yr EPS CAGR
	10.6%	19.2%	1.0%	–
Forecasts/ Momentum	Fwd EPS grth NTM	Fwd EPS grth STM	3-mth Mom	3-mth Fwd EPS change%
	0%	15%	-17.9%	-7.7%

Year End 31 Mar	Sales (€bn)	Profit before tax (€mn)	EPS (c)	DPS (p)
2021	1.69	47	45.0	nil
2022	1.87	104	96.9	nil
2023	1.89	104	89.5	nil
f’cst 2024	1.96	90	81.8	7.7
f’cst 2025	2.05	103	95.0	11.9
chg (%)	+5	+14	+16	+55
source: FactSet, adjusted PTP and EPS figures.
NTM = Next 12 months
STM = Second 12 months (ie one year from now)
£1=€1.16. *Converted to £, includes intangibles of £559mn, or 704p per share