Established in the late 1870s, industrial chains and gearbox maker Renold (RNO) is the oldest surviving company of its kind. It had, however, been hamstrung by "outmoded and sub-optimal working practices". Not now. New management is making Renold fit for the 21st century, and that's kick-started an earnings upgrade cycle that we believe has further to run.
- Turnaround on track
- Order intake ahead of sales
- Shutting loss-making factory
- Earnings upgrades possible
- Heavily incentivised management team
- Execution risk
- Pension funding obligations
Half-year results published in November offered proof. Revenue fell slightly, but a slug of self-help slashed overheads by a net £1.5m and adjusted operating profit jumped 42 per cent. Shutting the loss-making Bredbury plant next month will generate an extra £3.2m of annual profit. That's key to Renold achieving its goal of double-digit adjusted operating margins - compared with 3.8 per cent last year and 5.3 per cent in the first half. Meanwhile, merging its three UK defined benefit pension schemes last year will cut cash funding costs by £1.6m to £4.2m, says broker N+1 Singer.
Restructuring, however, is only part one of a three-phase master plan, begun by Mr Purcell soon after taking the helm in January 2013. Phase II - organic growth - kicks in once management has finished tinkering, followed by 'structural activities' after that.
And a return to top-line growth looks odds on later this year judging by recent comment from Renold. Order intake is running ahead of sales, it says, and results for the year to 31 March, due on 27 May, should at least meet City forecasts, revised higher after a bullish update in February. A decline in underlying group revenue had slowed to just 1.3 per cent in the four months to January, yet order intake was nearer 4 per cent.
RENOLD (RNO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 53p | MARKET VALUE: | £118m | |
| TOUCH: | 52-54p | 12-MONTH HIGH: | 68p | LOW: 19p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 14 | |
| NET ASSET VALUE: | 11p* | NET DEBT: | 80% | |
| *Includes intangible assets of £27m, or 12p a share | ||||
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 191 | 5.0 | 2.0 | nil |
| 2012 | 210 | 11.5 | 4.2 | nil |
| 2013 | 190 | 4.4 | 1.4 | nil |
| 2014** | 189 | 8.4 | 2.7 | nil |
| 2015** | 188 | 10.8 | 3.7 | nil |
| % change | - | +29 | +37 | - |
Normal market size: 5,000 Matched bargain trading Beta: 0.5 **N+1 Singer estimates, adjusted PTP and EPS figures | ||||
N+1 Singer has already raised its forecasts three times since October last year, and with improving industrial purchasing managers' indices, admits it may have to do so again in the months ahead. Renold's highly-cyclical core chain division, which supplies power stations, agricultural machinery, forklift trucks as well as fairground rollercoasters, will lead the way. But the smaller torque transmission business, which supplies escalator drives to both London Underground and the New York tube system, is improving, too.
Group earnings are forecast to have doubled in its recently completed financial year to the end of March, and EPS is expected to surge by about one-third in each of the following two years. That would be impressive, and management is certainly incentivised. Their three-year performance share plan will pay out 25 per cent in March 2016 only if Renold achieves compound annual growth rate (CAGR) of 30 per cent. It needs to be 50 per cent to pay out in full. And canny Mr Purcell has amassed a stake worth almost £2m, and chairman Mark Harper and finance director Brian Tenner another £500,000 between them.
