Gamble of the week: lean mean property company

By Paul Hill Aug 14, 2009

Paul Hill

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Renew Holdings is a UK construction (60% of sales) and engineering (40%) business specialising in social housing, rail, infrastructure and education. Due to the parlous state of the property market, it's been dragged through the wringer over the past 18 months.

But it has emerged far leaner than before and is hungry to secure new work, especially in the more resilient public sector and regulated private markets. Only three weeks ago it announced that it had won a basket of new contracts (worth £20m) in the land remediation, nuclear and water industries. These helped to boost its order book as at the end of March.

Better still, in the first half, Renew Holdings returned to profitability, declared a 1p dividend (yield 8%) and closed the period with a cash pile of £17.5m (worth 29p per share). So all the signs are that this company will survive the testing times ahead and generate substantial shareholder value.

Renew Holdings plc (Aim: RNWH)

House broker Brewin Dolphin is forecasting 2009 sales and underlying earnings before interest, tax and amortisation of £335m and £5m respectively, along with £298m and £4.5m for 2010. I value the stock on a six-times 2010 multiple, which, after discounting at 12% and adjusting for the cash pile, produces a fair value of over 60p per share.

The main snags for investors are those inherent to the sector: cut-throat competition, poorly priced contracts, customer bankruptcies and/or a severe cut-back in infrastructure investment. The firm has also been included in an ongoing investigation by the Office of Fair Trading into possible price-fixing by around 100 UK contractors. Lastly, the £101m pension scheme needs to be watched, albeit there was only a £0.5m deficit as at the end of March.

Yet with a respected brand and sound balance sheet, Renew looks like a home-run for the more adventurous investor. The chief executive and finance director both recently bought shares. 

Recommendation: speculative BUY at 36p (market cap £22m)

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

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