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Renewi stock: buy, sell, or hold? This is what I’m doing now

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FTSE Small Cap company Renewi (LSE: RWI) earns most of its income from dealing with commercial waste in the Netherlands and Belgium. The firm recycles and turns waste into materials such as paper, metal, plastic, glass, wood, building materials, compost, and energy.

Renewi stock has been performing well

The stock is notable for having risen from around 20p last September to around 55p today. However, in January 2018 it was close to 105p, suggesting plenty more potential upside from a recovery in the underlying business.

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But it’s worth bearing in mind the plunge in the stock began before the arrival of Covid 19. A combination of regulatory problems, stalled production, and high debts took its toll on investor confidence in the enterprise.

Adding the effects of the pandemic on top, there seems little doubt that Renewi became a recovery proposition. And judging by the recent rise in the stock price, recovery in the underlying business is gaining traction.

On 27 May, the firm delivered its full-year results. The report described “robust” performance and “good” progress with growth initiatives. Looking ahead, the directors declared an “improved” outlook for the current trading year to March 2022.

I think we can see why the stock’s been rising in some of the figures. Statutory profit came in at €11m compared to a loss of just over €77m the prior year. And core net debt declined to €344m from €457m. Those numbers are moving in the right direction and the directors also declared a “material upgrade” to their expectations for the current year.

Recovery and growth

The company made decent progress in the period with a number of growth projects. And chief executive Otto de Bont said the firm’s business model is driven by a transition to a “circular economy” as demand increases for recycling and higher quality recyclates. He sees more opportunities ahead for Renewi to convert waste into a wider range of secondary materials. And much of that trend will likely be driven by the policies of the EU and national governments.

Meanwhile, today’s share price near 55p put the forward-looking earnings multiple near nine for the trading year to March 2023. That valuation looks reasonable as long as operational recovery and growth continue. However, one factor to keep an eye on is the firm’s debt load. Although borrowings are lower now, they still represent a big burden to the company.

Another area of concern is that operations are low margin in nature and the business has yet to deliver decent returns against invested capital and equity. On top of that, the business has struggled to maintain earnings over the past few years. Shareholders really do need a change in fortunes to make sense of an investment in the stock now. So, I’d look for ongoing recovery and growth in earnings in the months and years ahead.

However, I’m in no hurry to buy the stock because the business still has a lot to prove. I’m watching from the sidelines for the time being.

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Kevin godbold has no position in any 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.

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