Shareholders in waste services provider Renewi (LSE: RWI) have certainly been cleaning up lately. The Renewi share price is up 102% over the past year.
I’ve been considering the pros and cons of adding Renewi to my portfolio.
Renewi: a bull case
I like the company’s footprint in the recycling space. I expect recycling demand to grow in the coming years. Renewi’s primary focus on a small number of developed European countries also attracts me. Countries like the UK and the Netherlands are affluent markets with increasing environmental focus. That suggests future growth in demand.
The circular economy is talked about by many green start-ups as well as Renewi. But Renewi already has long, deep expertise in recycling and waste management. It handles over 13m tonnes of commercial and domestic waste annually.
With 30 sites across the UK alone, the company is not an upstart with an idea but a functioning business with a sizeable customer base. Its revenue last year of €1.7bn underlines that point.
A bear case for the Renewi share price
I also see risks that could impact the Renewi share price.
Profitability is a concern for me. Renewi reported a post-tax loss last year. That was the case with many companies, but Renewi has been reporting such losses for years. In fact, its basic earnings per share have always been negative since it was formed through a merger in 2017.
There are lots of reasons why a company might not report a profit in any given year. Once exceptional items are excluded, Renewi’s profitability looks more attractive. But using the statutory basic earnings per share measurement, the company’s profitability looks unappealing to me. It suggests that Renewi struggles to make its business model deliver earnings with any regularity.
I also consider the company’s balance sheet to be unattractive. The company reported net debt of €660m in its latest annual report. That is larger than its current market cap of £398m (or around €463m). Having high net debt ultimately reduces the amount of cash flow that can be used to pay shareholders’ dividends.
Another concern I have about the future Renewi share price is possible spending cuts in local government.
The pandemic has hit government finances hard. I expect that in years to come, local authorities in key markets such as the UK will try to reduce costs. That could include cutting services or renegotiating prices. That could eat into profit margins for service providers like Renewi.
My reaction to the Renewi share price
How will I move to take action on my analysis?
I see growth potential in the business area in which Renewi operates. I also think its experience and scale help bolster its investment case.
But the underlying business performance concerns me. I follow the old adage “where there’s muck there’s brass” so would expect a recycling and waste disposal company to be consistently profitable. But Renewi’s basic earnings per share have been consistently negative.
I will keep an eye on the Renewi share price, but I will not be investing in the company for now. I will watch its future results to see whether it can improve its basic profitability.