Making industrial chains and specialist torque transmission products doesn’t sound very exciting but 150-year-old Renold (RNO:AIM) happens to be rather good at it and today is the second largest player globally.
The global market is very fragmented and despite being a big fish Renold’s market share is under 10% in terms of revenue, providing a significant opportunity to consolidate the market through acquisitions.
This means Renold can grow faster than the slow growing underlying markets which it serves. That is one leg of the investment case and key to creating shareholder value.
The business has also built a global reputation for engineering branded premium quality products and engineering solutions that customers can trust. Its products are built to a high specification and designed to last longer and be more reliable.
This is important for customers because a faulty or broken chain can be highly impactful and therefore, they are prepared to pay a premium price for a premium product. A trend towards increasing premiumisation is another leg of the investment case.
Management told Shares that increasing automation across many industries that use chains is acting as a tailwind for the business.
It is easy to fall into the trap of thinking that industrial chains serve traditional, low growth industries, yet increasingly Renold’s products are used in faster growing, high-tech and cutting-edge applications.
The final leg of the investment case is the potential for the business to increase operating margins towards a mid-teen’s percentage over time. Two factors are driving this expectation.
The group can grow two to three times larger than its current size with the infrastructure it has already, and with relatively fixed costs this means a bigger proportion of revenue can be turned into profit. This is often referred to as positive operating leverage effects.
In addition, central overheads can be removed from acquired businesses. It is worth mentioning ‘soft’ synergies like cross-selling higher value products which also drive incremental revenue and profit.
Financial metrics for Renold support the investment case.
Over the last four years revenue has increased at a compound annual growth rate of 6.25% a year, operating margins have expanded from 7.1% to 12.3% and return on capital is a healthy 22.5% % compared with 10.7% in 2020.
The company has reintroduced a dividend for the first time since 2005 reflecting strong cash flow generation.
In short, the potential for double digit profit growth and increasing cash generation is not reflected in a lowly seven times forward PE (price to earnings) ratio. Growth, quality and value is a rare combination not to be missed.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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