Renold geared for growth

Inheriting a company struggling with an industrial slowdown and dated management strategy, Mr Purcell instantly implemented a widespread cost-cutting programme as the first phase of a three-stage plan to salvage one of the UK's great engineers. Two years later, these actions have yielded superb results, but there could be much more to come looking at the profitability of international peers, such as Rexnord which boasts a 19 per cent margin compared with Renold's 8.5 per cent. Indeed, Mr Purcell has already identified further scope to reduce costs and boost efficiency, and expects margins to have reached the mid-teens by 2020.

The company's second strategic phase will focus on organic growth as well as margins. Lacklustre top-line progress hasn't held profits back so far, but a steadily improving global economic backdrop, together with a recent drive to invest in the sales force, could prompt a sharp uptick from the 2 per cent constant currencies sales rise posted in the financial year to the end of March 2015.

To aid growth, Renold is undergoing a recruitment drive to enhance its senior management team, with an aim to improve customer service while opening several new sales offices across Europe. Geographic expansion and product development have also been mooted as ways to help generate higher revenues.

Renold has been weighed down in the past by the cyclical nature of its core chain division that supplies power stations, agricultural machinery, forklift trucks and fairground rollercoasters. In the last financial year it was troubled mining markets in Australia that did most of the damage, although investors will be pleased to know that mining, oil and gas only account for a small proportion of sales. Importantly, Renold also serves more stable markets, such as providing products used to operate London and New York's recession-proof underground escalators.

The third phase of Renolds strategy is to pursue acquisitions, which should add further momentum to sales and diversify of the company's offering - management has already begun discussing the potential of a few small deals this year. This looks a more credible possibility after Renold generated free cash of £5.3m last year and reduced net debt by a fifth to £19.5m. This was the first significant cash generation in a decade. Interest costs have also fallen following agreement of a new £41m finance package.

However, the balance sheet is a concern due to a pension deficit which stands at £61.2m, so cutting debt is expected to remain a top priority for now. Broker N+1 Singer forecasts that debt will be down to £7.2m by 2018 and an optimist may be tempted to hope an ongoing widening of bond yields could alleviate some of the pensions pressure.

While the company is not currently paying dividends, management is keeping this topic under "active review", but has stressed that increasing capital investment is likely to take precedence for now as it seeks to deliver on its strategic objectives.