With its market capitalisation near £70m, Renold (LSE: RNO) is a small listed company. But I reckon the business may have a bright future.
The firm makes industrial chains and torque transmission products which it sells worldwide. Customers include original equipment manufacturers, distributors and end-users in sectors such as manufacturing, transportation, energy, metals and mining.
The directors can trace the history of the business as far back as 1864. However, the important thing is the immediate and longer-term prospects. And on that front, the news is good.
Pleasing figures
On 10 November, the half-year results report contained a robust and pleasing set of numbers. The directors pointed to “significant” growth in revenue, a “record” order book and “strong” cash generation. The cash performance helped the company reduce its net debt by £4.5m, to £13.9m.
There’s no doubt there’s a large cyclical element to the business. So it’s good to see the company using cash in the good times to reduce its borrowings. One of the features of the trading record is volatility in earnings from year to year. Therefore, I’d want the balance sheet to be as strong as possible heading into any general economic downturn.
But there’s little sign of weakness in the firm’s markets right now. And, looking ahead, chief executive Robert Purcell said he’s confident about the second half of the year, but “cognisant of the very volatile and inflationary world we operate in.”
Nevertheless, City analysts expect a double-digit percentage increase in earnings for the trading year to March 2023, hard on the heels of a triple-digit rise in the current trading year.
Of course, estimates are not set in stone and it’s possible for the business to fall short because of future operational challenges. However, with the share price near 30p, the forward-looking earnings multiple is just below eight when considered against those expectations. And, on the surface, that valuation looks undemanding.
Preserving cash
However, shareholder dividends are absent. And the company decided not to declare an interim dividend because of economic headwinds, such as the well-reported supply chain issues, raw material availability and inflation. The directors also cited “continuing investment in equipment and revenue expenditure to improve the performance of the business” as reasons to forego the dividend.
But I reckon those are valid reasons for withholding the shareholder payment. The Renold business has undergone something of a transformation in recent years as it turned itself around. Part of the process involved shedding outdated and inefficient working practices among other things — no doubt those old inefficiencies were a consequence of the long history of the business.
Now, the enterprise strikes me as fighting-fit for the modern world. It’s trading well, earnings appear to be growing fast and I’m bullish about the general world economy. So I’m tempted to invest £1,000 in the shares. However, as outlined in this article, there are risks.
