Should I buy this turnaround AIM stock?

AIM stock Renold is in the midst of a turnaround that is lifting its share price. Can it continue to cut costs and drive its revenue higher?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female analyst working at her desk in the office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I could buy AIM stock Renold (LSE: RNO) for 23.5p per share at the time of writing. If I had bought in May 2020, near the 20-year low price of 6.9p, I’d be sitting on a 246% gain. Alas, I did not. But then again, if I had bought in July 2015, at around 82p, then I would be down 72%.

It looks like I am dealing with a turnaround situation, given the highs and lows in the stock price. But before I deal with that, there is something I need to address.

Renold is an AIM stock?

Renold—founded in 1879—makes power transmission products like clutches, couplings, gears and gearboxes, sprockets, and industrial chains. How can a company founded in the 19th century, whose shares were first admitted for trading on the London Stock Exchange (LSE) in 1946, be an AIM stock?

Renold was listed on the main market of the London Stock Exchange. But it moved its entire share capital and became an AIM stock in June 2019. Being on AIM means Renold does not have to make acquisition approaches public unless the target’s market capitalisation, net assets, or pre-tax profit is greater than or equal to 100% of Renold’s. On the main market, the limit is 25%.

Renold’s CEO explained the move would allow the company to “execute transactions more quickly, more cost-effectively and with greater certainty“. Shifting to AIM is part of a broader strategy to cut costs and grow revenues after years of struggle — a turnaround.

Chaining together a turnaround

Renold had suffered through years of disappointing revenue growth and deteriorating margins that hurt the company’s share price.

Renold revenue (in millions of pounds) and operating margin (%) from 1998 to 2022

A bar chart showing Renold plc revenue has been mainly flat between 1998 and 2022, with an overlaid line chart of operating margin showing it to be volatile, and negative at points between 2004 and 2014, but demonstrating a rise after this point.
Source: Renold plc annual reports 1998 to 2022

In 2014, a three-phase strategic plan was formalised to turn around the company’s fortunes. Renold managed to increase its revenues from 2016 to 2019 — the year it became an AIM stock. Operating margins were also increasing, explained partly by moving manufacturing to China. This suggests the turnaround plans were working. Then the pandemic hit. However, 2022 revenues bounced back strongly, and margins held up. Importantly, sales per employee are increasing, and total overheads are coming down, a clear sign of increasing efficiency.

Renold key performance indicators from 2014 to 2022

A table showing management key performance indicators for AIM stock renold from 2014 with 2022 with Sparkling charts
Source: Renold plc annual reports 2014 to 2022

Renold operates in a highly fragmented market, making bolt-on acquisitions easier to come by. Only 7% of its sales are from high-growth economies. So Renold has room to manoeuvre for growth. Can it make meaningful advances and drive revenues beyond all-time highs? I would like to see that happen before I buy, and there is a new strategic plan that might help do this. Also, the company is spending around £5.5m in cash to fund its pension for the foreseeable future, which might drag on its growth potential.

Right now, I will keep an eye on this AIM stock and see if some of my concerns are allayed, but I won’t be buying today for my Stocks and Shares ISA. Sometimes in investing, it pays to wait and see how things develop.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »