Asia slowdown flattens Renishaw

Flat growth in its largest market and a 10 per cent drop in first-quarter profit had City analysts scrambling to slash forecasts for precision engineer Renishaw. The news also sent the shares down 16 per cent on the day of the announcement to a 12-month low and means the shares have now fallen 56 per cent since hitting an all-time high in July.

A 15 per cent rise in sales to £70.5m during the three months to 30 September was driven by 20 per cent plus rises in the European operations and Americas. But management had expected better, and a decision by an electronics customer to put new orders on hold meant revenue in the Far East, which had accounted for 40 per cent of full-year sales, was little changed.

Renishaw’s ambitious expansion plans also put a spanner in the works. The company has taken on an extra 538 personnel since September 2010, including 70 during the first quarter. That is thought to have added about 30 per cent to staff costs, enough to knock pre-tax profit by 10 per cent to £13.6m. Resources are now being diverted from the loss-making healthcare division to its core measurements business and bosses are taking a rather belated look at costs and future recruitment strategy.

UBS says…

Neutral. We lower our 2012 earnings estimate by 10 per cent to 77.7p, but it is not all bad and certainly not a repeat of 2008/09, in our view. Orders were tracking ahead of sales in the first quarter, China customers will have to restock again in 2012 and core western markets are strong. Meanwhile, management expects orders and revenues to show growth in the second quarter and profitability should improve. Renishaw will also be more commercial in future with regards to headcount and product development. There may be a buying opportunity later but for now the risks appear too great.

Singer says…

Fair value. We have reduced our target price from 1,350p to 900p to reflect double-digit cuts to our EPS forecasts for the next couple of years and to adjust valuation using a 30 per cent premium to the UK market average PE ratio, rather than the group’s typical through-cycle premium of 50-60 per cent. We estimate organic sales growth of just 6 per cent for both 2012 and 2013, reflecting £10m of ‘lost’ sales versus our expectations for the first quarter, and a more cautious approach to growth in 2013. We expect adjusted pre-tax profits of £71m and EPS of 78p in the year to June 2012 (2011: £80.4m/88.5p).