If I had to buy just one penny stock today, I would buy Renewi (LSE: RWI) for my portfolio. This £461m market cap company qualifies as a penny stock because, at the time of writing, its shares are changing hands for 52p.
Penny stock to buy
The business of disposing and managing waste is an interesting one.
Most people don’t know what happens to their waste when they put it out for disposal, and most people don’t care. But the whole process is tightly managed and controlled. It’s also getting harder.
Several decades ago, most waste went to landfill. That’s no longer the case. Digging big holes and filling them with rubbish is considered by many to be hugely destructive and polluting. Instead, nearly half of all waste in England today is recycled. I expect this figure is only going to increase over the next few years.
Recycling and disposing of waste is not a profitable business. Therefore, size matters. Bigger companies can achieve significant economies of scale. This generates larger profit margins, which provides more capital for investment and so on.
Renewi is one of the largest waste disposal businesses in Europe. Revenues totalled €1.8bn in 2020.
However, the business has not been profitable lately. Losses totalled €78m in 2020.
This may change in 2021. According to its latest trading update, underlying EBIT for fiscal 2021 is now expected to be around €68m. This kind of growth is highly impressive for a penny stock.
Of course, there’s no guarantee the company will hit this target. Nevertheless, I think it shows its potential. Debt is also expected to fall materially to less than €350m in 2021. That’s down from €457m in 2020.
Management believes that the company’s growth initiatives will deliver significant earnings growth over the next three years. According to the business, these initiatives, coupled with the global drive for a renewable future, will “deliver significant additional earnings over the next three years and beyond.”
Risks and challenges
The qualities outlined above are some of the reasons why this is my favourite penny stock. Still, this investment is not risk free.
Challenges include regulations, limiting the group’s ability to operate if governments decide to place more stringent restrictions on the recycling industry. Higher costs could also eat into profit margins. Rising costs may limit the firm’s ability to “deliver significant additional earnings.” Being a waste disposal business, Renewi also faces risks unique to the industry. These include the chances of a waste spill or additional pollution from the disposal of rubbish.
Despite these risks and challenges, I would buy the penny stock for my portfolio today. I believe it has a bright future as the world invests substantially more time and effort in preparing for a more sustainable future. I think Renewi could be a fundamentally important party in this development.
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Rupert Hargreaves has no position in any of the shares 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.