ESG stocks are taking the markets by storm. Or at least that’s what the Renewi (LSE:RWI) share price would suggest as it’s up by double-digits this morning. The stock surged by around 10% after the company released its highly anticipated half-year report. So, what has got investors excited? And should I be adding this green business to my portfolio today?
Turning plastics into profits
I’ve explored Renewi before. But as a quick reminder, this is a waste-to-product recycling business. Every year its facilities process around 14 million tonnes of garbage back into usable raw materials such as paper, metals, plastics, glass, wood, and even energy. Given the world is on a mission to cut carbon emissions, this ESG stock definitely seems like an active participant in this objective.
Last month, management released a short trading update that sent a clear message — business is going well. But it wasn’t until this morning that the market got to see precisely how well. And given the direction of the Renewi share price, I think it’s fair to say investors are quite pleased.
Over the last six months, revenue has grown by a respectable 11% to €916m thanks to rising recyclate prices. But the real star of the show was underlying profits. With pandemic-related cost savings being retained, operating margins have jumped by 4.7%. Combining this with higher recyclate prices led to earnings before interest and taxes skyrocketing 125% from €28.3m in 2020 to €63.8m today. At the same time, the firm’s net debt position also saw an €8m improvement.
Needless to say, this was a pretty impressive report. And management is once again increasing its performance expectations for its 2022 fiscal year. So, seeing the share price explode is hardly surprising.
The threats to the Renewi share price
As exciting as the ESG stock’s progress is, there remains a long road ahead. Beyond processing commercial waste, Renewi also has a division focused on treating water and compost. Its Mineralz & Water segment did show signs of growth, with revenue climbing by 4%. However, this is down from 21% a year ago due to the pandemic creating delays in issuing waste-import licences.
The adverse effects of Covid-19 are starting to wane, so this is ultimately a short-term problem. But it’s unclear just how long it will remain an issue. And if delays were to continue getting longer, it could cause management’s upgraded guidance to be over-optimistic. Obviously, if growth starts to slow, the Renewi share price could be in for a tumble.
Time to buy this ESG stock?
The last time I looked at Renewi, I decided to keep it on my watchlist. But after these latest results, I’m now considering this business for my portfolio. With investors becoming more ESG-focused and the demand for its services unlikely to fall any time soon, I believe its share price has plenty of potential over the long term.
Zaven Boyrazian has no position in any of the shares 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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