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Renold – again “Trading Update” = Profit Warning

By Steve Moore | Thursday 12 October 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Industrial chains and related power transmission products supplier Renold (RNO) has updated on trading including “the torque transmission division performed in-line with expectations. The Chain division delivered organic growth, but profitability was affected by machine break-downs at our Einbeck facility and by sustained increases in raw material costs”. Uh oh…

Chain division revenue growth for the company’s half-year ended 30th September 2017 was a result of a +8.2% Q1 performance, with Q2 -4.5% due to “major machine break-downs” at the Einbeck, Germany facility.

It is though noted that these have now been resolved, that “underlying order intake for the Chain division improved to 9.0% in Q2” and that “the Torque Transmission division remains on track to perform in line with the board's expectations”.

However, there has then been “sustained increases in raw material costs, notably in respect of steel... Margins in the period have been impacted by the lag between raw material increases being incurred and sales price rises working through the order book”. The sales price increases are now said to be “visible in the order book”, but the overall result is that “the board now expects adjusted operating profit for the group for the year to 31 March 2018 to be slightly below the lower end of the current range of analyst forecasts”.

Brokerage N+1 Singer understands the noted range to be £16.2 million to £17.4 million (why wasn’t this provided by the company in the announcement?) and expects to downgrade “to somewhere in the £15.5-16.0m range”. Fellow broker finnCap has downgraded to £15.7 million, seeing pre-tax profit to £14.3 million and earnings per share to 5p. It continues to look for 5.7p next year.

However, there remain net debt (finnCap “expect a higher level of £23.0m of net debt at the current year-end”) and pension issues to factor in and a significant second half weighting to meet forecasts. As such, even with the shares down from more than 60p they had recovered to earlier this year and still more than 50p yesterday to a current 46p, I presently continue to avoid.

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