Renishaw boosted by brighter outlook

The past 18 months have been tough for Renishaw (RSW), with the global slump in demand for semiconductors taking place at a time when the company has been committing substantial sums to expansion. But there are signs that things are starting to turn.

Demand from the semiconductor sector remained weak but stable and was offset by solid growth in other areas, such as analytical instruments and medical devices. A rebound in the Asia Pacific region – the company’s largest market – also helped to make up for much poorer performances in Europe, the Middle East and Africa (Emea) and the Americas.

Renishaw spent £40mn in capex in the first half, completing two new halls that will increase manufacturing capacity by 50 per cent and investing in new equipment for the first of these. Even though the second is being mothballed until there is sufficient demand, full-year capex to June is likely to be as high as the £74mn recorded last year. 

Chief executive Will Lee argued that it has been getting to grips with operational costs. Labour is its biggest expense, and although this increased by 2.4 per cent to £136.5mn, this was due to £1.9mn handed out in voluntary redundancy payments, which will save the company around £4mn a year. Headcount largely remained stable, too, as it took on 100 new graduates and 60 apprentices.

Cash flow from operations also more than doubled to £55mn as the company reduced both inventory levels and trade receivables. 

And things are looking up for the rest of the year, with an improvement in market conditions expected and the company pushing into new business lines including industrial automation products and a data platform that it is selling to customers. Adjusted pre-tax profit is expected to be between 16 and 60 per cent higher in the second half than the first, meaning the full-year figure should be between £122mn and £147mn.

Renishaw’s shares fell by 60 per cent from their peak almost three years ago to their trough in October last year (the month in which we published our buy idea). They’ve been climbing since and jumped by 16 per cent on this week's brighter outlook. This brings their valuation up to 29 times consensus forecast earnings, which is close to their five-year average of 30 times. But with a step-up in earnings expected over the next two years as the new manufacturing capacity comes online and capex normalises, we think they remain a decent long-term investment. Buy.

Last IC view: Buy, 3,438p, 5 Oct 2023