Could this AIM growth stock help you become an ISA millionaire?

This stock has already achieved a return of 3,600% for investors and it looks as if further gains are on the cards.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Renew Holdings (LSE: RNWH) is, without a doubt, one of the AIM market’s best-performing stocks. Over the past two decades, this AIM growth champion has delivered a total return for investors of more than 3,600%, excluding dividends — that works out at around 22% per annum according to my calculations. 

Renew has carved out a niche for itself delivering essential infrastructure maintenance tasks for regulated markets within the UK. As well as organic growth, the company has grown through acquisitions. For example, last November it acquired Giffen, a specialist mechanical, electrical and power services provider in the rail market.

And despite the headwinds buffeting the broader UK construction and engineering industry, it seems Renew’s specialist focus and reputation is helping the company stay ahead of its peers. 

Ahead of the game

According to a trading update issued by the firm today, in advance of its interim results for the half year ended 31 March, the performance of the group “continues to be strong” with current trading in line with management expectations. The update also mentions Renew is currently seeing an “increased forward order book.

Unfortunately, the release does not detail management expectations for growth, but according to City analysts, for fiscal 2018, Renew could report a 15.1% increase in earnings per share for the year to 34.2p. This target implies that the shares are currently trading at a forward P/E of 11.1. 

In my view, this valuation severely undervalues the company and its prospects, and it does not seem to take into account Renew’s historical record of earnings growth. Over the past six years, normalised earnings per share have risen by 130%.

Changing of the guard

I believe part of the reason for the company’s low valuation is the fact that the business is currently in the process of a management transition. The team that has led the firm over the past decade has stepped aside to make way for new blood. 

In September 2016, chief executive Brian May was replaced by insider Paul Scott, head of Renew’s engineering division and at the end of last year, finance director John Samuel was replaced by Sean Wyndham-Quinn, previously an advisor for the firm for nearly a decade.

The promotion of insiders should help smooth the transition, and it looks as if, so far, everything is going to plan. 

Cash-rich

The company is also benefitting from the fact that it has a small, positive net cash balance, although due to the timing of cash flows, management expects to report a “modest” net debt balance for the period ending 31 March. Still, unlike some of its peers in the construction and engineering sector, Renew is cash-rich, and conservative administration of the business has allowed it to maintain a healthy balance sheet while expanding through acquisitions. 

Moreover, robust cash generation has allowed the company to triple its dividend distribution to investors over the past six years. Today, shares in Renew support a dividend yield of 2.6%, and the payout is covered 3.5 times by earnings per share. As earnings continue to rise, I believe the company’s dividend will head in the same direction. 

So overall, as the next generation of management steps up, and the group builds on its existing strengths, organically and via acquisitions, I believe Renew will continue to produce market-beating returns for investors. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi shares hit £5 by 2030?

After a strong start out of the blocks this month, our writer asks whether Raspberry Pi shares could move further…

Read more »

Close-up of British bank notes
Investing Articles

Five 5%+ yielders I’d buy for an ISA today!

Our writer identifies a handful of FTSE 100 and FTSE 250 firms each yielding at least 5% he'd happily buy…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

5 stocks with 5%+ yields I’d love to buy and hold in a Stocks and Shares ISA

Harvey Jones is keen to add these five FTSE 100 high-yielders to his Stocks and Shares ISA, ideally before they…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d target £880 of passive income annually, spending £10K now on this FTSE 100 share

Our writer explains how he would add to his diversified portfolio happily by investing in this FTSE 100 passive income…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

3 reasons I think the Scottish Mortgage share price could keep rising

Christopher Ruane explains a trio of reasons he thinks the once-mighty Scottish Mortgage share price could be set to increase…

Read more »

Syringe and vial on blue background
Investing Articles

Is this forgotten FTSE share about to make investors rich all over again?

Not long ago, this FTSE share was all the rage before demand dropped off and things went south. Is it…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor…

Read more »

US Stock

Nvidia stock: 3 things investors need to know as it surges towards $150

Nvidia is a stock that's had an extraordinary run in 2024. Edward Sheldon highlights some important things investors should know.

Read more »