Renold (RNO) – The Mello BASH from Wed 29th November

My presentation from Wednesday provoked some controversy on whether the calculation of the 122p on this slide was correct:

https://twitter.com/MelloEventsUK/status/1729924967460995321

There are issues with this slide, not least of which is that the “total” at the top of the page isn’t correct, and for that (and the other points that I glossed over) I beg your forgiveness.  I finished these slides at 2am on the Wednesday morning and I didn’t have the chance to double-check them.  The overall point that I was trying to make was simply that Renold’s equity valuation would be materially higher if it traded inline with the rest of the sector.  Of course, the 122p number is spuriously accurate but I genuinely think that that’s the sort of ballpark re-rating that the stock deserves given time.  For the sceptics I would add that I was also chastised in the bar for NOT being optimistic enough - one fellow shareholder told me that they expected Renold to “ten-bag over the next few years” and that I was too pessimistic!

Let me start with the basic EV formula so that we are all on the same page:

Enterprise Value = market value of equity + market value of debt - cash

Combining this with EBITDA you can derive the multiple EV/EBITDA, which you would broadly expect to be consistent for companies within an industry (and large differences should be explainable).

My first assertion was that EV should include the pension fund deficit.  I don’t think that this is a particularly controversial point and a quick search on Google reveals that at least Phil Oakley agrees with me (see here).

If we also assume that the market value of the debt is par value then the formula simplifies since “market value of debt - cash” simply equals “net debt”.  Hence the EV formula that I propose is:

Enterprise Value = market value of equity + net debt + pension fund deficit

In the case of Renold this is £72.6m + £28.3m + £52.7m = £153.6m

And the EV/EBITDA multiple can be calculated as £153.6m / £41.8m = 3.7x

I then calculated a median sector average from the Stockopedia data of 8.6 and said that *IF* we were to use that multiple then that would imply a share price of 122p a share. This leap is where I lost a couple of people who seemed to be suggesting that the ratio of the two multiples x the share price ( 8.6 / 3.7 x 31.9p ) was only 74.1p and so my 122p couldn’t be correct. Let us go back to the formula to see how it is derived:

Enterprise Value = market value of equity + net debt + pension fund deficit

And also Enterprise Value = M x EBITDA where M is the applicable EV/EBITDA multiple

Rearranging gives us

market value of equity = M x EBITDA - net debt - pension fund deficit

and hence: market value of equity = 8.6 x £41.8m - £28.3m - £52.7m = £278.5m

Thus, if the market cap is £72.6m at 31.9p a share, then a market cap of £278.5m must equate to 122p a share ( £278.5m / £72.6m x 31.9p ).

So 122p is the correct answer, albeit of course the number is spuriously accurate.  I accept that Small Caps Life may well want to judge me on the above but let me take pre-emptive action before they highlight the other issues with the above:

1. When using an EV/EBITDA calculation it is important to determine whether you are using pre-IFRS 16 numbers or post-IFRS 16 numbers. IFRS 16 is the accounting standard that capitalises leases as debt on balance sheet and my strong personal preference is to use pre-IFRS 16 numbers. Whilst the net debt that I’ve used above is pre-IFRS 16 the EBITDA that I’ve used is not. However, the difference wasn’t that great (about £2.8m lower) and I knew that if I used a different EBITDA than what was shown in the accounts then that would also provoke questions. I also knew that there were other issues and so this wasn't a major point …

2. Stockopedia’s numbers are calculated using post-IFRS 16 numbers, hence the EV that it shows on each page includes capitalised leases and the EBITDA that it uses is before the deduction of lease payments. This also means that the EV/EBITDA multiples that it calculates are post-IFRS 16 multiples.  I am therefore guilty of using a post-IFRS 16 sector median average and then applying it in a manner that implies a pre-IFRS 16 use (notwithstanding that the EBITDA was actually post-IFRS 16).  To be honest at 2am in the morning I was simply happy that the number was “about 8”, which is about where I thought it should be.

3. For the sake of completeness, I would also note that Renold's market cap at 31.9p is £71.9m rather than the £72.6m that Stockopedia told me at 2am last Wednesday morning (based on 225.4m shares in issue). 

If you adjust the numbers for all of the above they make no material difference to the calculation and, more importantly, they don’t alter the point that I was trying to make: Renold is absurdly cheap and deserves a material re-rating. 

JakNife

aka “Kevin Taylor”