Theresa May may not have formally announced plans for a large infrastructure investment push but with the PM evidently less austerity-focused than her predecessor and trade groups lobbying hard, it’s looking likely that some sort of infrastructure stimulus package is on the way for the UK.
Whether the investment is in railways, highways or power plants, one major beneficiary will be Renew Holdings (LSE: RNWH). Renew owns a variety of subsidiaries that provide engineering and long-term support services for a variety of customers including Network Rail, major utilities and telecoms.
While there are plenty of companies out there that would benefit from major infrastructure investments such as construction firms or materials manufacturers, Renew has several characteristics that make it an attractive long-term investment to me.
First, by making maintenance services contracts a large part of its business, Renew protects its downside by ensuring long-term revenue visibility throughout the business cycle. This is evident in the order book, which increased 9% year-on-year over the past six months to £515m, roughly equal to full-year 2015 revenue.
Second, Renew has a very healthy balance sheet. Net debt at the end of the last reporting period stood at a very low £4.2m and the company expects to have net cash at the end of the year. Having low or no debt to service further protects the company during economic downturns and also gives Renew ammunition for acquisitions.
With revenue growing even without a major government-led investment push, operating margins increasing consistently and a healthy balance sheet, Renew is one cyclical on my watch list come the next eventual economic downturn.
Big is beautiful?
One company that would benefit more directly from any infrastructure-dominated stimulus plan is Irish construction giant CRH (LSE: CRH). While CRH has contracts stretching across the globe roughly half its sales are in Europe with the UK a major market.
CRH provides materials for construction companies ranging from cement and asphalt to fencing and shutters. This is undeniably a highly cyclical business but CRH has a few competitive advantages that most competitors don’t enjoy.
Most important among these is the company’s sheer size. With annual revenue topping €23bn last year, CRH benefits from the operational efficiencies of its massive scale. Combining back office operations and maintaining dominance in a wide range of local markets helped boost operating margins to 4.6% for the past six months.
Geographic diversification also provides some insulation against a downturn in a single market. Of course, the downside to being in more than 20 countries and being so large is that it’s rather difficult to increase sales enough to provide significant organic growth.
That’s why CRH is highly acquisitive. The latest splurge was last year’s $6.5bn purchase of regulator-mandated divestments from Lafarge and Holcim related to their merger. These new assets helped boost revenue by a full 35% year-on-year over the past six months.
There are many other construction materials companies out there, but CRH’s proven ability to make large acquisitions work for shareholders, intense focus on margin improvement, geographic reach and steadily increasing dividends make for a high quality company whatever path Theresa May takes.
