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Renold RNO 50% upside..?


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I thought so take a quick look at renold as it is down 52% on year, yet it is up 13% on the release of today’s final results.

I wonder is now one of the bad news is in the price, and I wonder whether there is quite an easy 50% upside to be had.  Assuming that the macro environment remains favourable.

 

Key info

Market cap today of £57.9m

Forecast PE of 5.7 based on 2018 an eps of 5.1p

Forecast turnover £197.5m

Forecast PTP £13.6m

Broker target price 49p (92% upside inferred)

rno.JPG

 

Starting with the negatives that are fairly well known

  • Pension deficit
  • A cyclical business
  • Heavy machinery which generally lends itself to low return on capital and low margins.
  • Executive pay is quite high if not excessive

 

And the positives

  • Has a good history dating back to 1900s and listed since ninties.
  • Has historically paid a dividend
  • Has cash on the balance sheet
  • Strong current ratio, so no short term liquidity issues
  • Is running a strategic initiative: step 2020
  • Potential takeover candidate for a group such as Melrose as possibility
  • And as diversified income streams 37% of sales from America, 31% from Europe and 7% UK

 

The broker targets are not particularly to stretching as they imply a £5m sales stretch and 13% EPS growth on what has been attained in 2018 (£192m and 4.5p adj )

Today’s trading updates cited order uptake of 7.2% and good conditions in USA (where bulk of sales occur) “The rate of growth in Europe slowed through the year and has been superseded by growth in the Americas, where Canada has been particularly strong..” and “In the Americas, order intake grew strongly with an increase of 11.7% up ” It does note some risks to the US in “the US, which represents 31% of our revenue, the recently introduced import tariffs have the potential to disrupt the markets in which we operate.”

 

It looks like RNO made a slip up last year as they quote “During the year ended 31 March 2018, raw material costs increased significantly and we were too slow to respond, resulting in an ongoing lag in passing these increased costs on to customers. This, combined with factory disruption, impacted profitability in the first half. Action to pass increased costs to customers through sales price increases has been implemented and, with the factory disruption behind us, profitability increased in the second half of the year.”

So margins were impacted by price increases which were absorbed internally initially, but are now  being reflected in prices.  In fact the company goes as far as to say expects profit margins to increase

“Despite this, we expect growth, recovery of material price increases and continued efficiencies to overcome cost pressures and deliver improved adjusted operating profit margins”

PTP of £14.7m is down on prior years £17.1m and is attributed to raw material cost increases (now being passed on ) breakdown of machinery (economic inefficiencies) and increased transport freight costs as a result.

Its customer base seems fairly broad which provides a level of de-risking, with the largest customer accounting for 5% of sales only. So no chance of a sudden shock due to customer habits, I would think.

 

Pensions, the big balance sheet liability, have been reduced app from £103m (2017) to £97.4m The group is conscious of the risk here and cites “The Group remains committed to progressively de-risking this position over time through a combination of agreed contributions to the schemes and specific de-risking projects as they become viable.  ”

 

For the year ahead, we expect growth to continue as improving macroeconomic conditions strengthen order intake. Those same macroeconomic conditions are resulting in inflationary pressures on raw material costs and labour rates, which have also been impacted by legislative changes in some territories. Despite this, we expect growth, recovery of material price increases and continued efficiencies to overcome cost pressures and deliver improved adjusted operating profit margins.

“Progress in mitigating the impact of raw material cost increases through the year is demonstrated by improvement in the adjusted operating profit margin from 8.0% in the first half of the year to 11.2% in the second half”

So if those improved margins can be obtained at 11% and the company does £194m-£197.5 of sales this year (ie flat again or improved) then that gives inferred O/P of £21.34m - £21.73m, considerably above the £14.2m (£6m H1 and £8.2m H2) reported today..?

 

 

The board take a fair old wedge out of the business, 2016 (CEO, CFO) (£1,015m, £483k), more muted in 2017 (CEO, CFO) (£363k, £56k) and £220k to non execs.

 

The directors have bought at higher levels previously.

rno3.JPG

 

 

rno2.JPG 

 

 

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Guest PandaFace

Fantastic article. Did you ever open anything on this as it looks to be sat happily above 30 at the moment would have been a good bid.

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With 37% of trade/sales coming from the States what sort of risks do you see with a change to the larger macro landscape? I've spoken to our TV team about this article and they're looking into the possibility of doing another video you may find interesting. I'll update you if it materialises. 

 

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I didn't. I should have! I am trying not to deploy too many positions at the present, as it can be a bit unwieldy. But This looked fairly certain for at least short term gains, I think it is above 20% gain since I posted. I am not tracking it that closely. There is another small UK quoted industrial manufacturer I need to write up on too, which I think it a good proposition based on recetn results. Certainly a buy if the market dips. More on that later.. 

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Super, will watch the video when I get a moment. As to the impact of US Trade sanctions, then the quickest way to get a view is from the annual report or results which always details risk and outlook. I found the below which is pertinent to the question, esp the parts in bold and underline:

 

"Macroeconomic landscape and Brexit

There are a number of well-publicised macroeconomic risks on the horizon. We continue to deliver our strategy, cognisant of the risks, but similarly very aware that the impact of these risks is uncertain and should not delay our plans.

 

In Europe, the Brexit process creates uncertainty for Renold and for our customers. However, with only 7.8% of our Group revenues generated in the UK and with the majority of export sales from our UK Torque Transmission plants to non-European destinations, we do not believe that we are overly exposed to risk in this area.

 

In the US, which represents 31% of our revenue, the recently introduced import tariffs have the potential to disrupt the markets in which we operate. The initial programme of tariffs does not directly impact our finished products, but does cover a number of our raw materials, which we largely source from US-based suppliers. While it is too early to determine the impact of these changes, or whether the scope of the tariff arrangements will be further extended, our operating model currently includes US-manufactured product combined with imports of products from other global Renold manufacturing locations. As a result, we have flexibility to adjust our manufacturing strategy and adapt our approach if required in response to longer term changes in the competitive environment"

 

EG, the final sentence suggests that manufacturing of other products could be brought into US, to mitigate US tarrifs (or that is how I read it..

 

SOURCE: http://investors.renold.com/~/media/Files/R/Renold-IR/documents/company-reports/company-reports/preliminary-results-2018.pdf 

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  • 1 month later...
  • 2 weeks later...

anyone taking this trade would now be 32% in profit on the initial call.

I'd be inclined to place my stop a point or two under the 50ma (29.9) and run the position. Then move the stop up if and when the price moves up. Looks likely to be going higher still.

Shame I didn't take it. ?

/thread closed, methinks, unless anyone else wants to use it.

Capture.thumb.JPG.c71a376dc981262dbb33417363ad905e.JPG

Edited by rimmy2000
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  • 4 weeks later...
2 hours ago, PandaFace said:

Buy at 25 sell at 35? Nice one well done!

I think it is the timing I am happy most about here. We looked aat this company potentially being under-valued, and then triggered the buy on the reversal of the downtrend, which has proven out.

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