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Writer's pictureMark Watson-Mitchell

Renold – the shares of this chain company are underrated at just 30p.

Delivering engineered and power transmission products across the world does not sound like a fascinating enough business to get worked up about – but after last week’s results from Renold (LON:RNO) I think differently.


The results for the year to end March 2019 saw the company report an operating profit of £16.4m, which, with its shares trading at just 30p, compares with a market capitalisation of a mere £67m.


That operating profit figure is the highest the company has reported for over 15 years. It makes me realise that this company’s shares are wrongly rated – I believe that they could well double in a fairly short period of time, so now represents a good buying opportunity.


Renold is an international engineering group. It produces a wide range of precision products and it owns merchanting operations in some 20 countries globally.



It manufactures and sells power transmission and conveyor chain, as well as selling torque transmission products.

Clutches, freewheels, processing equipment, vibratory drives, gears, leaf chain, sprockets, transmission and conveyor chain – Renold handles the lot.


Its products are used in a very wide variety of industrial sectors: transport, mining and quarrying, agriculture, environmental, food and drink, materials handling, construction machinery, and for manufactured products.


The company’s market-leading products can be seen in a multitude of diverse applications from subways to power stations, cement making to chocolate manufacturing, escalators to quarries – literally anywhere where something needs to be lifted, moved, rotated or conveyed.


That range of uses is why its products are in such demand across the world.


It has all been plain sailing for Renold and that is why it is currently progressing with a three-stage strategic plan to improve its business.


The first stage is to restructure its operations and boost efficiency. It has in the last year moved its chain factory in China, the £1.8m costs of which were incurred in the latest results.

The results reported that the company’s operational performance is improving whilst its return on sales is also progressing. But still more can be achieved in its management’s view as part of its important Step 2020 Strategy.


The second stage is aimed at organic growth, sustainable growth ahead of its underlying markets.


With the third stage being focussed upon acquisitions – with a view upon accelerating growth and scale benefits. As part of this stage the company is moving down from the premium market to AIM on Thursday 6th June, which creates flexibility to execute more quickly, with greater certainty.


The company is looking to expand its presence into new products niches or sectors, which will see the scalable benefits showing through to the bottom line. It will also look to fill in its geographical footprint, thereby boosting additional volume through its facilities from sales of existing products into acquisition target’s customer networks.


Acquired growth can also be achieved through the company’s recent investment in capacity and capability creating scope for fold-in acquisitions, with additional volume through fewer manufacturing facilities creating greater economies of scale.


Its acquisition criteria is well defined – focussing upon bolt-on opportunities that are capable of delivering strong margins through synergy and scale benefits. The company has identified clear sector gaps in its existing range so it will be seeking out in certain specialist sectors, as well possibilities in both power transmission and conveyor capabilities.


The group is now aiming at delivering double-digit margins capable of being delivered through its internal initiatives, with the target of mid-teen margins being achieved with sustainable organic and M&A growth.


The year to end March 2019 saw revenue of £197.85m and pre-tax profits of £13.67m, with earnings of 4.77p per share.


For the current year estimates suggest £203m of sales will see £14.94m pre-tax and earnings of 5.22p.


For the next year sales of £208m could see profits of £16m, worth 5.45p on earnings per share.


The company has 225.4m shares in issue, with significant shareholders including: M&G Investment Management (14.3%), BennBridge (13.2%), Discretionary Unit Fund Managers (12.0%), Henderson Global Investors (11.5%), AXA Investment Managers (5.2%), Hargreave Hale (5.0%), BlackRock Investment Management (4.7%), Royal London Asset Management (3.9%), FIL Investment Advisors (2.8%), and Chief Executive Robert Purcell owns 2.6%.


Renold is certainly on the move and so too will its shares soon be as they reflect the group’s potential to succeed in its Step 2020 Strategy.


Trading on a paltry 6.3 times price earnings ratio, 5.7 times current year and just 5.5 times prospective the shares of Renold at only 30p are a giveaway. Just watch them rise when acquisitions are afoot.


I set a 2020 Target Price of 60p.


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