Good morning! Shares in Manchester-based industrial chains business Renold (LON:RNO) have doubled in the last six months to about 41p, driven by a turnaround in performance from cost-cutting. I last reported on this company here on 22 Oct 2013, when they issued a very positive trading update, indicating that full year results (to 31 Mar 2014) would be "substantially ahead of current market expectations". So their interim results to 30 Sep 2013 announced this morning should show a good improvement on last year's H1, which they do.
Turnover is down 1.1% to £95.6m for the six months, but adjusted operating profit is up 42% to £5.1m. That equates to adjusted EPS of 1.1p. The outlook statement indicates that H2 is expected to deliver a similar result to H1, so that means 2.2p for the full year is looking likely. So at 41p that puts these shares on a PER of 18.6, hardly a bargain.
It's even less of a bargain when you consider that this £90m market cap company also has net debt of £22.0m, a whacking great pension deficit of £65.3m, and doesn't pay a dividend. Net tangible asset value is only £0.8m, and this can only be seen as a stretched Balance Sheet, weighed down as it is with high net debt and a large pension deficit.
Opinions are divided on how to treat pension deficits. They are likely to continue shrinking as corporate bond yields rise (which reduces the present value of scheme liabilities), but in this case a rate of 4.5% is being used, which probably doesn't leave huge scope for further improvement? It is not clear from today's results what the overpayment arrangements are with the pension fund Trustees, so I would need to investigate that from their last Annual Report before investing here.
The buoyant share price seems to be driven by expectations of further improvement in trading from additional costs being stripped out, and I suppose perhaps an expectation that recovering economies might generate more demand for industrial chains? It must be an internationally competitive sector though, so this just doesn't strike me as an exciting investment, especially where trading improvement is only being driven by stripping out costs. Not to mention the enormous debt & pension overhangs. It's difficult to see them being able to pay meaningful dividends any time soon.
…
