Rebound strengthens Renold’s links

Any chain is only as strong as its weakest link, and thankfully for Renold (RNO) improvements in profits have allowed it to bolster its balance sheet at the same time as reinvesting in its business.

The Manchester-based gear and chain maker enjoyed a rebound in sales in most of its international divisions, with revenue in its biggest market, the Americas, growing by 16 per cent. 

This improvement in sales fed through to its bottom line, which in turn allowed it to increase capex by £2.2mn to £5.1mn as it installed more equipment whose delivery was delayed by the pandemic, as well as spending £9.5mn more on inventory to make sure it had enough stock to overcome supply chain challenges. Even after this, it still had enough spare to continue paying down borrowings, with net debt (excluding leases) reducing by £4.6mn to £13.8mn.

This, and a £15mn improvement in the funded status of its whopping pension deficit (£87.1mn at the year end) as bond yields increased meant it finished the year with net assets of £5.8mn, compared to net liabilities of £14.7mn for its restated 2021 accounts.

Broker Peel Hunt expects adjusted earnings per share to be flat over the next 12 months. Although the size of its order book increased and it has so far managed to pass through higher costs to customers, both supply chain challenges and inflation levels remain elevated. For Renold, the latter could actually be useful in terms of its pension liabilities if bond yields continue to climb. We upgrade to hold from sell on the back of its improving financial position, even if the prospects for its end markets remain uncertain.

Last IC View: Sell, 10 July 2019