Renold - time to shake its chain?
What explains the recurring weakness of Renold’s (RNO) share price? Over the last year, when the FTSE 100 has fallen by 3.5%, RNO’s shares are down by around a fifth, even though the company has doubled its operating profits, to £14.1m, and seems set to grow its profits by more than a quarter in the current year. Hard to believe RNO’s shares were trading above 40p at the end of 2010.
One reason might be that the company has ditched last year’s target of achieving a 10% sales margin for its current 2012/13 year. In 2011/12 it boosted its margin from 3.7% to 6.7%. Whilst RNO says that a 10% return on sales target remains its “firm goal”, it is not going to be met this year, and it is now unclear when it will be finally achieved.
The main reason for the slippage in the 10% margin target is the sharp slowdown in RNO’s sales growth. In 2011 RNO’s sales grew 19% and in 2012 they were up 9%. A year ago RNO was reporting 12% underlying sales growth in its first quarter.
But at last week’s AGM all the company would say is that it expected “mid-single digit sales growth in 2012/13”. With luck RNO’s sales could grow by 5% a year over the next three years – roughly half the double digit medium-term sales growth rate being forecast a year ago.
Another reason for RNO’s lacklustre share price performance is that the group’s new advisers – Arden Partners were appointed in May – appear to be more conservative in their forecasting of RNO’s profits than Singer Capital Market.
In 2012 RNO reported adjusted EPS (earnings from continuing operations before exceptional items after tax) of 4.2p. Singer is reported to have been forecasting 5.9p for 2012/13 and 7.4p for 2013/14. By contrast, Arden is believed to be forecasting 5.3p for this year and 6.5p for next.
At 31p this puts RNO on a multiple of less than 6 times 2013 earnings. This looks undemanding given the scope for growth of Torque Transmission, the smaller but far more profitable of RNO’s two core businesses. It also makes RNO look cheap compared with Scapa, another similar sized Manchester recovery stock, which is trading on 11.5 times current year’s earnings, and is also not paying a dividend.
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2 comments
Profit warning ( http://www.investegate.co.uk/Article.aspx?id=201208020700091031J ) ... but doesn't sound that bad -
'Trading conditions have softened in a number of territories due to macro-economic uncertainty. Against this backdrop, Chain delivered strong double digit growth in North America which, combined with mixed positions elsewhere in the world, resulted in a marginal overall reduction in sales ... The level of available near term opportunities in Torque Transmission and Chain, combined with continuing reductions in our cost base, will enable us to maintain some positive momentum in profitability in the year as a whole, albeit at a level which is below current market expectations.'
So that's a prospective Pe of under 6 with expected eps growth of 26% this year and 22% next year. I hold some and continue to view them as very undervalued with little downside as it would appear do the directors given recent buys. I think they need a dividend to help the share price. From the AGM report an interim dividend seems unlikely perhaps a final dividend would be possible. I can;t really see why not.
More likely if this undervaluation continues I'd think there's a decent chance they would make a good acquisition target (see TSW which I also hold today)