UK stock Renold (LSE: RNO) is backed by a business with a market capitalisation of around £140m. So it’s a small-cap enterprise and not for widows and orphans.
Nevertheless, the international supplier of industrial chains and related power transmission products has done its shareholders proud over the past few years. But director-speak makes me believe there may be more to come.
A multi-bagging share price
In the 2020 pandemic sell-off, the share price plunged to around 6p. Today (17 July), it’s near 59p, and the company just crowned that spectacular progress with a bumper set of full-year results.
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Although small-cap stocks can be risky, they can sometimes also deliver high rewards for investors.
However, it would have taken a stout heart to buy the stock in the wake of the pandemic when economies were crashing. I first became interested in November 2021 and typed a bullish article with the stock near 30p.
It’s done all right since then, but chief executive Robert Purcell said in today’s report the business is now at an “inflection point”. The compounding effect of many recent exciting initiatives is “coming to fruition”.
It’s hard to argue with that assessment. In the 12 months to 31 March 2024, adjusted earnings rose 20% year on year. Net debt dropped by more than 16% too, suggesting a strong cash performance backing up the business progress.
To top-off the positive feel to the report, the directors initiated a small dividend for the year of 0.5p per share. That’s the first in around 19 years, and I think that tells us something about the business and the sector — things can be tough for both.
There’s no denying the cyclicality present here. Indeed, a lot of the strong gains enjoyed by shareholders since 2020 have come from the business turning itself around. Even now, a half-decent general economic down-turn could pull the rug from revenues, earnings, cash flows, dividends, and the share price. To flirt with this stock is to flirt with such ongoing risks.
Steady growth ahead?
But Purcell is optimistic about the company’s future. Continuous improvement initiatives are building an “ever-improving” platform to support the directors’ commercial initiatives.
The focus is on targeting and consolidating the “highly fragmented industrial chain market” with an acquisitive growth strategy. There’s a rich pipeline of “appropriately sized and relatively low-risk opportunities”, Purcell reckons.
Meanwhile, the directors expect the current trading year to be less challenging but they are remaining vigilant.
My assumption is this business is on a long-term growth trajectory now. But progress could be slower than we’ve seen recently. City analysts have pencilled in an increase in normalised earnings of about 13% for this year and 8% next.
However, those potential advances are short of the double- and triple-digit percentage gains seen lately.
Nevertheless, when set against those estimates, the forward-looking earnings multiple looks undemanding at around eight. On balance, and despite the risks, I think this stock is worth further research now with a view to considering the stock for a long-term investment.
