Whilst it may well be best to avoid dipping a toe in the market at present given the ongoing headwinds and general weakness, there are nevertheless some decent looking opportunities.
One such company that has caught my eye recently is Manchester based Renold, a long running and well established business that is focused on manufacturing the likes of industrial chains, gearboxes and couplings.
It is a company that I am well acquainted with, which having for many years resided on the main market, stepped down to the junior AIM three years years back.
As an industrial engineering business, it will come as no surprise that it is - by nature - prone to cyclicality and therefore it is fair to say that talk of an impending recession could see it firmly in the firing line.
Additionally, anyone else who is familiar with the business will know that it has endured problems over the years which resulted in the share price heading one way southwards, resulting in an axing of a then chunky dividend and subsequent raises to shore up the balance sheet.
However, in more recent times, Renold has been something of an ongoing turnaround story that has, in the last year seen an acceleration of that and once more attracted investor interest.
As I write, the shares sit at 27p valuing the business at £61m which, given current market forecasts looks decent value where it currently trades on a single digit PER.
Admittedly, it has something of a ball and chain in the form of an ongoing pension deficit that requires funding, along with net debt on the balance sheet.
That said, Renold has been making marked and notable progress on the debt front which has reduced to a much more comfortable level, whilst the pension situation appears to being managed well enough that it shouldn’t be of concern.
Indeed, given the recent progress on both front’s dividends could well be back on the agenda in the coming years.
For now though, given its strong performance, further debt reduction appears to be and rightly so the priority for the board led by CEO Robert Purcell who has overseen the turnaround.
Looking at the debt situation this is expected to have reduced from £18.4m to £13.8m when the company reports its final results in little over a week’s time, with further falls to follow in subsequent years.
This should also, after previously announced upgrades, see revenue for full year 2022 come in at £195m with EBITDA at £24.4m providing for adjusted pre-tax profits of £10.7m and which would see EPS of 3.7p.
That puts the stock on a PE of little more than 7, which is someway below peers and looks worthy of a much closer look, particularly as the business looks to be in an altogether different place.
I guess, that the cheap looking rating though, is largely down to current market sentiment and avoidance, along with the worry that a business like this could quickly become a victim of those recessionary headwinds and inflationary fall out.
No doubt Investors will get a better handle on the latter come those results, but given the most recent update from the company, the picture could well remain positive providing for further and ongoing progress.
In its pre-close Trading Update released in April, the company delivered a stronger than expected announcement, with robust sales accompanied by order book growth supported by the important ability to pass on costs.
Renold has also successfully implemented a number of efficiency measures and cost reductions, along with residing over a strong and welcome working capital performance.
In the April update the company also stated that the order book was at a record high at £84m which is a vast improvement on the £53.6m seen a year earlier.
Much of Renold’s turnaround success can be attributed to an extensively broader offering and end customer base, where it is no longer at the mercy of a few major end markets which impact at times of a sharp slow down.
In the past mining and energy accounted for a sizeable amount of revenue and whilst the company still serves these areas, (which no doubt remain very buoyant), it now covers numerous areas of industry.
These include agriculture, marine, leisure, food and drink along with transportation. There is also more recently exposure to defence business where Renold has on its books a long-term military contract worth £11m.
Additionally, the Manchester based company that has operations around the world has for some time been seen as being a likely Brexit winner, along with gaining on the back of a weak pound as with other exporters.
In terms of its specialist chains, these are now used extensively across the logistics and distribution markets along with emerging markets such as high-tech manufacturing and automation, each of which should continue to offer growth.
In that context, it is perhaps also worth noting broker FinnCap’s comments regarding the reigning back on globalisation and the move to shorten supply chains.
“This localisation plays into the hands of Renold’s wide geographic spread of manufacturing, close to its main centres of customer demand. - We would argue that this shift away from globalisation will stimulate customers’ capex in greater automation and capacity upgrades in W. Europe and N. America. - The group should gain from customers wanting to purchase premium products that deliver enhanced operating attributes – with Renold’s chain demonstrating reduced wear, greater energy efficiency and greater longevity.
As an example, some of Renold’s chains have lower lubrication requirements, thereby lowering operating costs and hydrocarbon usage. This also plays into customers’ greater focus on the ESG and sustainability agenda”.
With Renold now delivering on positive cash generation on the back of organic growth, it is also keen to add selective bolt-on acquisitions in specific niche areas that can complement the wider group and provide for further earnings improvement.
Importantly, these could now be funded internally, without the need to go to the market, where it also appears that there are plenty of suitable prospects for the company to target.
I am hoping to arrange something with the company post the results next week, but for now have elected to take an early opening position, given what looks like an ongoing turnaround story where the rating looks deep in value territory.
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