Renold – Time To Get Chained Up?

This company’s Interim Results are due next week and should point to an outcome for the full year beating market expectations. 

The Business 

Set up in 1864, this Wythenshawe, Manchester-based group, which employs nearly 2,000 people, is involved in the manufacturing and sale of high precision engineered products and solutions in the UK, the rest of Europe, the United States, Canada, Australasia, China, India, and internationally.  

It is a truly global group, producing a wide range of such products, while owning merchant operations in twenty countries.  

It serves various sectors, including agriculture, forestry and fishing, construction and machinery, energy, environmental, food and drink, manufactured products, material handling, mining and quarrying, and transportation industries. 

The group’s market-leading products can be seen in diverse applications from cement making to chocolate manufacturing, subway trains to power stations, escalators to quarries; in fact, anywhere something needs to be lifted, moved, rotated or conveyed. 

Its Operations 

The company operates through two segments, Chain and Torque Transmission.  

It offers inverted tooth chain; and transmission chain including general transmission, low maintenance, abrasion and corrosion resistant, and drive chain, as well as klik-top polymer block chain and standard attachment chain.  

The business also provides gears and gear boxes, which includes transit escalator and series bridge scraper drive, custom gearing solution, worm and helical gears, carter hydraulic speed variators and gear refurbishment, and oil condition monitoring system, as well as couplings, freewheel clutches, and leaf chains.  

In addition, it supplies conveyor chain products including bucket elevator, welded steel conveyor, escalator, heavy duty drag, draw bench conveyor, screen, and waste-water treatment chain, as well as trident chain, and standard conveyor chain and attachments. 

Further, the group offers processing equipment and vibratory drives, such as shakers, QE and rotary electric vibrators, vibratory fill stations and conveyors, and vibratory feeders, as well as bulk bag unloaders; and sprockets and accessories, including chain wear guides, chain pin extractors, tensioners, and cutters, as well as cycle chains and product handlings.  

On A Sales Basis 

Looking at the group’s end March 2023 £247m revenues, the split-down on a sales per business basis showed the Chain division generating 81.5% of turnover, while the Torque Transmission side accounted for the balance 18.5%. 

On an international basis the group’s sales per region were broken down 42% in the US and Canada, the Rest of Europe 29.6%, Australasia 10.2%, the UK 7.7%, China 5.0%, India 3.8%, with Other Countries taking 1.6%. 

Management Outlook 

The £65m capitalised group will be announcing its first half-year results next week, on Wednesday 15th November. 

In early September the group issued a positive AGM Trading Update. 

It noted that global markets continued to be uncertain, with ongoing labour cost inflation and material costs remaining high when compared to historic levels.  

Whilst there was a normalisation of demand in some of the group’s end markets, it retained strong order books of around £86m, which remain high by historical standards, despite a shortening of lead times, reducing the overall quantum. 

As a result of the continued positive trading momentum, and an increase in activity from the recently announced Davidson acquisition, the Board now anticipates achieving results for the year ending 31 March 2024, higher than previously expected. 

The Equity 

There are some 225.4m shares in issue. 

Larger holders include Rights & Issues Investment Trust (13.31%), Jupiter Asset Management (12.75%), Canaccord Genuity Wealth (11.09%), Hargreaves Lansdown Asset Management (8.92%), Janus Henderson Investors UK (8.42%), Renold Employee Benefit Trust (7.49%), Tellworth Investments (7.41%), Interactive Investor Services (7.01%) and M&G Investment Management (4.99%). 

Broker’s View 

Analyst David Buxton at Cavendish Capital is obviously very confident about the group’s prospects because he has fixed a Price Objective of 58p on its shares, which is twice the current price. 

Impressed by the recent small bolt-on earnings enhancing acquisition of an Australian conveyor chain business, together with the strong start to the current year he has increased his profits estimates. 

For the year to end March 2024 he is looking for steady sales at £244.3m (£247.1m) while its adjusted pre-tax profits of £17.1m (£18.6m) could generate 5.5p in earnings against 5.9p last time. 

The year to end March 2025 could well produce £246m of revenues, £17.4m of profits, and 5.5p of earnings per share. 

Buxton concludes that the shares remain deeply undervalued, now at just 29p, despite resolving many of the group’s historical issues and a series of upgrades, while offering significant potential upside.  

My View – Setting A New Target Price 

The outfit’s shares were down to 20.6p around this time a year ago, since when they have peaked at 33p. 

The shares are trading at only 5.3 times current year price-to-earnings, which I do feel is far too low a rating, especially considering the size of its current order book. 

Last night they closed at around 29p, at which level I would suggest that they offer some attractive, recovery-based, undervalued upside. 

The analyst consensus average Price Objective is 56p. 

The Target Price that I set four pre-Covid years ago, in retrospect, was obviously a hopeful nonsense, however from the current level I do feel that my new objective of 36p is a significantly more achievable Price Aim in the medium-term. 

(Profile 04.06.19 @ 30p set a Target Price of 60p)