Renold clicks into recovery mode

Two key recovery metrics suggest there could be significant upside for the share price. Renold's price-to-sales ratio of 0.7 sits well below the peer average and suggests potential for a significant re-rating if the company can realise its ambitious target of achieving mid-teen operating margins by 2020, compared with 7 per cent underlying margins at the half-year stage. Meanwhile, the half-year book-to-bill ratio of 1.01 (anything over one hints at future sales growth) suggests trading could finally be moving in the right direction for the group after a number of years of falling revenues.

Significantly, the group's conveyor chains segment (77 per cent of last year's revenue), stands to benefit from the improvement in underlying prices for the extractive industries - copper recently hit a 20-month high. Management's efficiency drive has had the effect of stabilising adjusted operating profit in conveyor chains despite a contraction in divisional sales. However, remedial measures have failed to stem losses at the smaller torque transmission arm (23 per cent of revenue).

As well as cutting costs, the group has made some small acquisitions to boost prospects, the most recent of which was the tooth chain division of Aventics a year ago. This is reported to be performing better than expected. The business, located in Lower Saxony, provides niche industrial applications typically seen in bottling plants and other manufacturing facilities.

While net debt of £26.2m does not look a concern on its own, the company's massive £112m pension deficit definitely is. That said, the collapse in bond yields was a key cause of the deficit ballooning in recent years. Yields began to go into reverse last year and many expect this trend to continue. Should it persist, the deficit should shrink and the shares could benefit in turn.