|Shares Out. (in M):||800||P/E||0||4.59|
|Market Cap (in $M):||289||P/FCF||0||0|
|Net Debt (in $M):||551||EBIT||84||128|
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Renewi PLC (RWI LN) is an UK listed waste management / recycling (waste-to-product) company whose assets are primarily located in the Benelux (Belgium / Netherlands). RWI’s stock trades in Pounds but it’s reporting currency is Euros. Over the past 16 months RWI’s stock is down 73%. While several negative items have transpired during the period, we believe the primary driver of this decline has been the Dutch regulator restricting the operating rates of all soil remediation facilities in the Netherlands, including RWI’s ATM facility. As we explain below, we believe this is a temporary situation. While we do not know the exact timing of a restart, we note that 1) the Dutch regulator has publicly stated this is temporary, 2) RWI is cashflow positive excluding growth capex and its dividend in the interim, and 3) there has recently been a spate of insider buying, most notably a first time buy by RWI’s general counsel who is likely leading the negotiations with the regulator. Today RWI trades at 4.61x FY21 (3/31/21) consensus P/E which assumes the facility is restarted, compared to RWI’s historical 12x trading multiple. We believe the stock should double once the facility restarts. We cannot predict the timing of this though in the interim you are paid a 5% dividend to wait.
Company Overview: RWI was created in 2017 by the merger of Shanks Group Plc (“Shanks”) and Van Gansewinkel Groep B.V. (“VG”). Shanks was a UK listed waste management company with assets in the UK, Canada and Benelux. VG was originally a family owned business with assets primarily in the Benelux region. In 2009, VG was acquired by KKR and CVC, but restructured in 2015 leading to lenders taking over ownership. Shanks acquired VG for E482MM funded E130MM w/ debt and E352MM with equity. At the time of the merger there were positive expectations for RWI’s assets in the Benelux region driven by market consolidation and expected synergies. Additionally, there is a long-term secular growth story in recycling in Benelux driven by tightening government regulations – most recently illustrated by a 20-25% tax driven increase in the cost of incineration (the alternative to recycling). These items, while continuing to take place, are beyond the scope of this investment recommendation.
Today RWI has five segments: 1) Commercial Waste - Benelux recycling, 2) Hazardous Waste – the ATM soil remediation facility and Ryem, an industrial tank cleaning facility focused on the North Sea oil and gas industry, 3) Monostreams – four “other” recycling businesses including Coolrec- a recycler of electronic appliances, Mineralz – which produces recycled building materials, Orgraworld – an organic waste treatment facility and Maltha - a glass recycling JV with Owens Illinois , 4) Municipal – traditional garbage collection in the UK and Canada and 5) Corporate overhead. We estimate the following 2020 EBIT by segment, 1) Commercial E89MM, 2) Hazardous E2MM (ATM -E10MM / Ryem +E12MM), 3) Monostreams E16MM, 4) Municipal E0MM and 5) Corporate -E31MM for total EBIT of E76MM. This compares to FY20 consensus of E95MM. If ATM were operating, Hazardous would generate E37MM of EBIT and total EBIT would be E111MM (where consensus is for FY21). We believe the major delta between our FY20 estimates and consensus is we have ATM out for the full year while consensus has it returning mid-way through.
As of 9/31/18, RWI had core net debt of E496MM (excluding the E91MM of non-recourse UK debt) and a mkt cap of E262MM for an EV of E750MM. ~10x EV/EBIT w/ ATM out and burning -E10MM/yr in EBIT and ~6.8x EV/EBIT w/ ATM operating at historical E25MM/yr EBIT levels. The average European comp trades at ~12x EV/EBIT (Veolia, Suez, Pennon, Biffa, Derichebourg, Seche).
Background on ATM: The ATM facility takes contaminated soil from commercial sites and re-mediates it so that it can be reused. This treated soil is not designed to be re-used for farming but is used in concrete, asphalt and other structures. ATM is the largest facilities in the Netherlands though there are several other private companies which operate similar facilities (Broerious, Vink, Ecotechniek, NBM). In 2017 two cows died while grazing in a ditch which had run-off water from treated soil. This led to a local news channel filming an expose on the industry. Here are two links which discuss both items -they are in Dutch but google translate works. Background on cows: https://www.ad.nl/amersfoort/grond-is-nooit-schoon~a62e98cf/. Background on documentary: https://www.2doc.nl/documentaires/series/2doc/2017/december/beerput-nederland.html.
Following the expose, the Dutch regulator got involved. What started as more of an inspection has turned into a political debate. In the summer of 2018 the Dutch Secretary of State made a speech to parliament stating that the gov’t needed to review the role of secondary materials in society to make sure they are not harmful. The Secretary of State stated that the Dutch people want secondary materials to be part of society but they need to figure out the right long-term regime. Importantly, the regulator stated that while it figures out the right long-term regime, there needs to be an interim regime in place so the industry can operate. Speaking to industry consultants the recurring theme is the industry and regulator are working on a solution, but no one knows how long the process will take.
RWI, has especially handled communication around this issue poorly. For all of 2018, their message to markets was we are close and we should have an update in three months. They may have genuinely believed this but have been proved incorrect in their assessment. In their 3/29/19 trading statement, management has now changed tack and guided to the facility being out for all of FY20 (3/31/20) though when you talk to management, they continue to believe progress is being made and in fact the pace is accelerating.
Debt Levels: The ATM facility is 20-25% of RWI’s EBIT. Alone, the uncertainty it has created is not that big of a deal. RWI has a banking facility with a 3.5x net leverage covenant versus their current debt levels of 3.1x and ATM’s uncertainty couple with RWI’s debt levels appears to be what has led to the dramatic sell-off in RWI’s stock. It is important to note that E91MM of RWI’s debt is nonrecourse debt associated with its UK division and should be excluded from it’s leverage calculations.
In FY20, with ATM out for the full year (-E10MM of EBIT), we estimate the company will generate E30MM of recurring levered FCF. Here is a breakdown of our cashflow estimates.
We don’t believe the market understand RWI’s balance sheet flexibility / that E91MM of debt is non-recourse. In FY21 if ATM were still down and RWI were to cut synergy / growth spend and the dividend (but still pay the E14MM of one-time below EBIT costs associated with ATM), RWI would be generate +E15MM of levered free cash flow. In FY18, RWI’s average cost of debt was ~5%. The is not a company with its debt trading at distressed levels. RWI is far from having liquidity, refinancing or solvency issues.
Asset Sales: Still RWI has stated it is above it’s leverage targets. In response to this, earlier this year RWI announced that it was undertaking an asset sale program. RWI is selling its’ Canadian municipal business (E5MM of EBITDA / E2MM of EBIT) and it’s Ryem industrial cleaning business (E14MM of EBITDA / E12MM of EBIT). The company has stated that it expects the assets sales to de-lever the business by .5-.6x implying an EBIT sales multiple of 12.2x. These asset sales should be completed in the next couple of months. Our research indicates that the Canadian asset is a desirable asset as we are seeing significant consolidation in the North American waste market industry. The Ryem asset is a little trickier. It cleans industrial tanks for the North Sea oil and gas industry and is ex-growth. Additionally, the wastewater is processed partly by the ATM facility. There is interest in the facility though the sales multiple will likely be lower than the CAD business.
What do you need to believe for RWI to work:
1) RWI completes one or both assets sales – While we argue above that the company is cashflow positive before one-time items with ATM down, the asset sales definitively removes any risk associated with the balance sheet and provide the company runway to fix ATM. The asset sales were started at the beginning of the year and the CFO has guided to them being completed over the next couple of months. The smaller Canadian assets should have a lot of interest. The Ryem asset may be more difficult to sell but we see that being reflected in the multiple the company may receive.
2) ATM is restarted – The Dutch regulator has publicly stated that treated soil will play a role in Dutch society long-term and an interim solution is needed while the right regime is determined. Calls w/ ex-employees and consultants in the industry confirm this. Additionally, it is important to understand that this industry exists because there is contaminated soil that needs to be treated. That said we don’t know when ATM restarts or what a restart look like (costs to re-configure or higher costs of treatment). RWI currently trades at ~10x EV/EBIT vs. peers are 12x+ with ATM down. ATM is costing RWI -E24MM of cashflow/yr which is capitalized into RWI’s valuation, any improvement is upside. While RWI has always had insider buying in February and April 2019 it has picked up and we are also seeing new individuals who have not bought stock in the past buy. During Feb and April, the Chairman, the CFO, the General Counsel (Baukje Dreimuller) and two divisional heads have all bought stock.
Summary: When RWI is able to restart the ATM facility, under conservative numbers the stock will double. We believe it is not a matter of if but when, this is supported by 1) the Dutch regulator’s public comments, 2) our primary researching speaking to consultants and former employees and 3) the recent insider buying. Why does this opportunity exist? 1) the company is small and several analysts recently stopped coverage, 2) the market doesn’t like timing uncertainty and 3) the market doesn’t understand the companies balance sheet flexibility / liquidity.
Other Items that Need to be Discussed:
1) Soil remediation is a regulated business. In regulated business illogical and nonsensical things can happen which should be considered in sizing. With that out of the way it is helpful to understand why this business exists and how the economics work. RWI is paid both by individuals who need to dispose of contaminated soil and additionally by those who buy the treated soil. The primary reason this industry exists though is because there is contaminated soil which needs to be disposed of. The current debate is around what level of treatment is required and what the appropriate uses of treated soil are. To the extent that the regulator requires a higher level of treatment, it is important to keep in mind the primary driver of profitability of soil treatment facilities is the amount of soil that needs to be treated versus the amount of treatment capacity. In an industry with full capacity utilization (today) additional costs are a regulatory “tax” that will be paid by developers who are looking to build on old industrial sites. In an extreme scenario, where the regulator said, this soil cannot be used for anything and must be buried in the ground, it would still likely need to be treated so it didn’t leak containments
2) RWI’s CEO Peter Dilnot tendered his resignation on 11/5/18 with an effective date of 4/1/19. Peter received a new job with Melrose Industries PLC. Otto De Bont is his replacement. Peter had been at the company for seven years and as part of its succession planning strategy the company hired Otto De Bont in 2017 with the goal of Otto taking over. One former employee told me that while Otto was always supposed to take-over he expected Peter to stay for another year to complete the merger integration and the timing was a little surprising. We have not spoken to Peter but management’s LT incentive scheme is based on 50% EPS, 25% share price and 25% ROE. Due to the ATM issues (which is somewhat out of Mgmt’s control), management has not hit their LT incentives scheme which may have played a role in Peter finding a new job a year earlier than anticipated. Otto takes over 4/1/19 and we view the 3/29/19 trading statement as his “kitchen sink”, the stock opened down 20% but closed the day down 4%.
3) The Shank’s legacy UK municipal business has turned into a dog. RWI entered into fixed price contracts with municipalities to provides waste management services. A portion of the assumed profitability was based on being able to re-sell waste materials. When China banned the import of waste materials at the start of 2018 it led to a dramatic drop in their resale prices and the profitability in this segment. Today this segment is cashflow break-even on an EBIT basis and there is ~E10MM of below EBIT onerous contract provisions associated with the segment - these are included in the previous cashflow numbers. Additionally, RWI has one facility in East London which ships it’s waste to the Netherlands to be incinerated. If there were a hard Brexit and they were unable to ship that waste to the Netherlands, they would be forced to landfill it which would add E3MM in cost/yr for the next four years.
4) The southern UK ships a significant amount of waste to the Netherland’s to be incinerated. This has tightened up the Dutch incinerator market and led to elevated incinerator gate fees – which is helpful for RWI’s Benelux recycling business as it encourages more recycling. A hard Brexit, where the UK could not ship waste to the Netherland’s could lead to a drop in Dutch incinerator prices. Since Brexit was announced the amount of waste being shipped from the UK to the Netherland’s has decreased 30% having been replaced with demand from Poland, but there is still risk
5) A large portion of recycled materials come from the construction and housing industry. While not super cyclical, there is an aspect of cyclicality to the business.
1) Completition of Asset Sales
2) Restart of ATM facility
3) RWI next reports 5/23/19
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