Renishaw capitalising on automation rush

Panic over the shortage of semiconductors and other key parts for electronics manufacturers had to manifest somewhere beyond fewer cars being built. For precision engineering firm Renishaw (RSW), the ramp up in spending on high-tech manufacturing capacity resulted in its highest sales ever and stronger profits, even with significant increases in production costs in the year to 30 June. Labour shortages also helped drive industrialautomation demand.

The company had a rollicking calendar-year 2021, marked by its unsuccessful sales process. Its share price has only come down since that effort ended last July without any convincing offers, potentially opening the door again for interested parties, but executive chair Sir David McMurtry (a 36 per cent shareholder) said both he and 16.6 per cent shareholder John Deer remained committed to Renishaw. 

Growth is in the pipeline via a headcount increase this year and a £64mn project to add capacity to the Wales production facilities over the next three years. This is the dominant part of the capital expenditure plan, with £88mn committed as of 30 June company wide. 

There are worries going forward, however, as this year may mark a high point for industrial demand if recession starts to bite. McMurtry said the rougher conditions were already having an impact, even if the order book was in good shape. “We have... recently seen a weakening in order intake from the semiconductor and electronics sectors, and general market sentiment is becoming more cautious,” he said. 

This was at the same time as costs climbing – total cost of sales climbed 16 per cent in the year to £313.5mn. On an adjusted basis, profit outstripped this, pushing the adjusted profit margin up from 21 per cent to 24 per cent. The key adjustment was a one-off charge of £11.7mn from added pension scheme liabilities. 

Analysts are bullish about Renishaw continuing to grow: consensus estimates are for further sales growth in the 2023 financial year and continued improvement in profits, peaking in the near-term at £179mn in 2024. 

A shock to global spending would clearly knock this, but given its key role in high-tech supply chains, Renishaw should be able to hold on to a significant client base even if the world puts the brakes on. The dividend increase doesn’t hurt either, especially with the share price on a rocky path. Buy. 

Last IC View: Buy, 4,831p, 3 Feb 2022