ESG is a growing trend in the investing world. Investors like myself are now considering the impacts their cash has on the environment, but also social and governance factors too. Renewi (LSE: RWI) is a company in the ESG sweet spot right now, and the shares are up a whopping 229% over one year.
The company released its half-year report yesterday and the shares surged a huge 11% on the day. I put this stock on my watchlist last year, so is it finally time to buy or am I too late?
Renewi’s business
Renewi is a waste-to-product company. Its services include waste collection, recycling and treatment of commercial waste.
Renewi operates through three broad divisions: Commercial, Mineralz & Water, and Specialities. But it’s Commercial that generates the most revenue. It’s this division that does the collecting, sorting, treatment and recycling of waste materials. After the company collects and sorts the waste, it’s able to produce such things as paper, glass, wood chip, and even green energy too.
There are some great stats on the company website showing successful outcomes from its operations. As an example, 65% of the waste received last year was recycled, and there was enough rubble to create 15,000 houses!
It’s easy to see why an ESG-focused investor would be interested in the shares.
The half-year report
The company has a clear ESG theme, but I also want to know how it’s doing financially before I consider buying the shares.
In the half-year report this week, it said revenue increased 11% to €916m. Most impressively though, underlying earnings before interest and tax (EBIT) rose 125% to €63.8m. It was the Commercial division that performed so well as the EBIT margin increased by 4.7% to 9.6%.
For me, this increase in margin is great to see. In fact, a reason I had it only on my watchlist originally was because margins were a bit thin. Last year, for example, the gross margin was 15.9%, and the EBIT margin was only 4.3%. I have a strong bias for businesses with high margins, and this company didn’t fit the bill, so things could be changing.
The board at Renewi also issued a strong outlook statement in the half-year report, confirming that expectations are being upgraded again for the year ending March 2022.
Closing thoughts
I’m hugely impressed by Renewi’s half-year report. In particular, the increase in EBIT margin does help to answer a concern I had over low margins in the business. There’s also the ESG boost I think the company will benefit from for years to come.
I do still note the considerable investment the company has to make each year. Last year alone, €66.8m went on capital expenditure, and net income was only €18.2m. The business is very capital intensive, and can help to explain why return on capital employed consistently averages low single-digits.
With all that in mind, I’m happy to keep the stock on my watchlist for now.
