Renewi (LSE: RWI) is a waste-to-product company. It operates mainly in the Netherlands, Belgium, and the UK. Renewi’s share price rose about 200% in the past year.
I want to review the company to understand if this is the right ESG (environmental, social, and governance) stock for my portfolio.
The bull case for the Renewi share price
Renewi released its fiscal year 2021 results yesterday. The results were better than the management’s estimates. The stock closed the day with a gain of 3.77%. Revenue fell by 5% to €1.7bn despite disruption from Covid-19. Underlying EBIT (earnings before interest and tax) dropped by 3% to €73m; this was above the earlier estimates. The strong performance, particularly in the second half of the year, led to the upgrade to 2022 estimates.
Renewi’s ESG evaluation score was recently revised by Standard & Poor’s, to 83 from 75. The ESG evaluation score of 83 reflects Renewi’s above-average focus on recycling and waste management. The company benefits from operations in one of the most advanced circular economies in the world. A circular economy, in practice, is aimed at eliminating waste and continual use of resources.
There is a growing awareness about the need to protect the environment. Governments, especially in Europe, have already taken the lead in climate protection. Renewi operates in an industry that I believe has strong long-term growth prospects. This is also evident in the words of the company’s CEO: “The transition to a circular economy will increase demand for recycling and higher quality recyclates, which supports our business model”.
Another reason why I like the company is that it has improving cash flows. This shows efficient cost handling by the management. The company’s Renewi 2.0 programme is also progressing well. It has two key themes: the first is digitisation of the business. Next is simplification and harmonisation of processes by simplifying the product offering and eliminating redundant activities. The cost of the three-year programme is €40m, and it is expected to save the company €20m annually.
Risks to consider
Recycling is a costly process. It involves huge capital investments. The margins are thin in this industry. This is also seen in the company’s financials as it reported losses in the preceding years. Only this year was the company able to report a profit of €11m. It reported a loss of €77.1m for 2020.
The company’s debt is another concern for me. It has a debt of €720m. The debt to equity ratio is 2.96, which is very high, in my opinion.
Regulatory, environmental rules, or changes in law and policy of the countries in which the company operates could add additional costs. Also, the increase in the Covid-19 cases could derail global economic growth. This would hurt the company’s earnings and negatively impact Renewi’s share price.
Taking all things into consideration. I like the company’s business model and the sector it operates. However, the low profitability and high debt is a matter of concern to me. So, I am not a buyer of the stock now. I will keep the stock in my watchlist for my ESG portfolio.
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