QUALIPORT
Value On The Watch List

By Maynard Paton (TMFMayn)
February 3, 2003

Two members of the Qualiport's watch list -- Renishaw (LSE: RSW) and Games Workshop (LSE: GAW) -- published their interim results during January. Both firms produced very reasonable figures, which was somewhat heartening given the general stock market carnage. In fact, for investors with an eye for a recovery, shares in Renishaw are still priced attractively for the long term.

Renishaw

Renishaw published its results on January 23rd:

Six months to                31/12/2002         31/12/2001

Turnover (£m)                   51.5               51.2
Operating profit (£m)            5.4                4.0
Pre-tax profit (£m)              5.4                3.7

Earnings per share (p)           7.4                5.8
Dividend per share (p)           5.34               5.08

* The company develops, designs and manufactures specialist measuring equipment known as probes. These devices, together with the associated software, allow manufacturers to automate the precision machining of their components. The market-leading probes are "the industry choice" and Renishaw is reported to have at least an 80% share of the market. Read more.

* Because of the global economic downturn, demand for Renishaw's products has taken a bit of knock. For instance, during the year to June 2002, turnover slumped 17% and profits halved. However, business has stabilised of late. The interim results showed sales steady at £51m and operating profits remaining around the £5.4m mark (if you ignore a £1.3m restructuring charge in 2001). The dividend improved 5% and cash in the bank amounted to £33m (45.5p per share).

* The latest results hinted at a recovery on the horizon. While product demand was still below the levels witnessed two years ago, Renishaw confirmed there had been "a continuing improvement in trading conditions, particularly in the last three months". R&D expenditure increased during the half-year and three new overseas subsidiaries were established, too.

* At 327p, Renishaw shares are valued on a forward price to earnings (P/E) ratio of 17.6 and offer a prospective dividend yield of 5.1%. However, because Renishaw has a long, fine business record and is run by very experienced management (who have coped with many economic peaks and troughs before), it makes sense to value the shares on a 'recovery basis'.

Going back to the early 1990s recession, it took Renishaw five years to exceed its 1990 earnings peak. But even during the relatively bleak years of 1992 and 1993, Renishaw shares traded on a price to earnings (P/E) ratio of 20 (a level similar to the boom years of 1996-2001).

So, assuming 2008 sees...

* Renishaw regaining its 2001 EPS high of 34p, and;
* The shares trading on a P/E ratio of 17.5.

... then the shares could stand at 595p five years out. Add on an estimated 80p of dividends (five years of 16p per share annual payouts), and the total investment return by 2008 could be 348p (595p - 327p + 80p) per share. At today's 327p price, that projection equates to a 15.6% annual compound return. On this basis, the shares look very attractive for a long-term investor.

Games Workshop

Games Workshop published its results on January 28th:

Six months to                01/12/2002         02/12/2001

Turnover (£m)                   58.1               51.6
Operating profit (£m)            6.6                6.1
Pre-tax profit (£m)              6.6                6.0

Earnings per share (p)          14.0               12.5
Dividend per share (p)           4.5               4.15

* Games Workshop describes itself as "the largest and the most successful tabletop fantasy and futuristic battle-games company in the world." The group designs, manufactures and retails all the components that make up its various games, including a vast array of miniature soldiers, paint and rulebooks. Products linked with the Lord Of The Rings have stoked recent interest in this niche gaming genre. Read more.

* After various operational problems a few years ago, the company continues to make good progress. The interim results showed sales up 13%, operating profits up 8%, earnings per share up 12% and the dividend up 8%. Bright spots were the UK (Games Workshop's most mature market), where operating profits rose 12% (to £3.2m), and continental Europe, where operating profits rose a staggering 72% (to £6.1m).

* Operations in 'the Americas' proved troublesome. Turnover here fell 5% and operating profits dived 73% as Games Workshop found sales to independent retail outlets "challenging". However, twelve additional company-owned stores were opened in the Americas during the latest six-month period, with more outlets on the cards. Perhaps the independents have switched to rival products as Games Workshop opens up nearby?

* Aided by a dedicated and relatively price insensitive customer base, Games Workshop remains upbeat on its long-term growth potential. Indeed, should the company's overseas markets ever reach the level of turnover per head of population seen in the UK last year, annual sales would to triple to over £300m.

* The shares are no obvious bargain. At 437p, they stand on a forward P/E ratio of 13.3 and offer a prospective dividend yield of 3.4%. Assuming maintenance capital expenditure is 25% greater than the accounting depreciation charge, Games Workshop generated 28.3p per share of free cash during the twelve months to December 1st 2002. Demanding a historical free cash flow yield of 7.5% requires an entry price of 377p.

Discussion boards: Games Workshop | Renishaw | Qualiport

The author owns shares in Games Workshop.