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Look beyond Asia with Renishaw

The metrology specialist has had a tough time in Asia, but the underlying business is strong
June 13, 2019

With two profit warnings in 2019 and the group suffering due to the Chinese slowdown engulfing industrials, it may seem an odd time to buy shares in precision engineering outfit Renishaw (RSW). The economic maelstrom wrought by President Trump’s protectionism shows no short-term signs of abating. But neither does Renishaw’s track record as a quality business, and we think that a markdown of the shares has opened up a buying opportunity.

IC TIP: Buy at 3,908p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

High ROCE and margins

Metrology division’s 3D printing business is thriving

Medical products experiencing rapid growth

Strong balance sheet

Bear points

Two profit warnings on Asia weakness 

Threat of cyclical downturn

Sino-US trade dispute

Renishaw is a specialist in ‘metrology’ systems (measuring equipment) and healthcare products. Its fledgling healthcare operation is in fine fettle, with revenues over the nine months to the end of March 2019 up 14.2 per cent. The group is the leader in dentist laboratory scanning technologies, while Renishaw is also leveraging its edge in metal 3D printing, which we’ll return to. The business is witnessing strong growth in spectroscopy, where it leads with its Raman product line, helping customers analyse materials with cutting-edge microscopes.

But healthcare revenues only amounted to 6 per cent of its nine-month turnover. The picture is, for now, a bit bleak in metrology, which saw revenues fall over the same period from £406.6m to £404.5m, a drop of 0.5 per cent. Like many industrial companies, Renishaw has faced a decline in demand from Asia, specifically for its encoder products, and from large end-user manufacturers of consumer electronic products. It revised its expected revenue range for the year from a spread of £635m-£665m, down to £595m-£620m in March, then to £580m-£600m in May. Renishaw’s statutory pre-tax profit target range has dropped from £146m-£166m to £111m-£126m over that period. The shares fell 11 per cent on the first profit warning, quickly recovered, then dropped 6 per cent on the second.

A lack of access to management makes some analysts nervous about forecasting the business’s prospects. But there is recognition that Renishaw scores well on key quality metrics, persists with its investment strategy in the face of volatility, and guards innovative advantages. The group’s return on capital employed (ROCE) and operating margins have, in recent years, improved to outstanding levels (see chart below). Over its first half, and in spite of macroeconomic uncertainties, Renishaw’s net engineering expenditure rose more than a fifth to £47.7m. These metrics, tied to investment that is supported by a strong balance sheet with a hearty net cash position, tell us that the company is well placed to ride out any market turbulence and kick on once the storm is over. Renishaw is also busy raising barriers to competition and has filed more than 1,800 patents, including the highest number of patents in 3D printing.

 

 

The metrology division may be in a sticky place for now, but increasing focus on efficiencies across sectors, including automotive, aerospace, medical and electronics has magnified the market’s potential. Intelligence provider Grand View Research estimated the market size at $652m (£514m) in 2018. With the market forecast to grow at an annual compound rate of 5.9 per cent, it could be worth just shy of $1bn by 2025. As a leader in these technologies, with a sound underlying business and continued investment for the future, Renishaw is well positioned to capitalise.

Renishaw (RSW)   
ORD PRICE:3,908pMARKET VALUE:£2.8bn 
TOUCH:3,910-3,906p12-MONTH HIGH:5,745pLOW:3,510p
FORWARD DIVIDEND YIELD:1.6%FORWARD PE RATIO:24 
NET ASSET VALUE:754pNET CASH:£100.5m 
Year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201642761.771.848.0
201753711714152.0
201861215518260.0
2019*583107122.760.0
2020*615139160.363.0
% change----
Normal market size:500    
Beta:1.39    
*Peel Hunt forecasts, adjusted pre-tax profits and earnings per share