Questor: this overlooked precision engineer trades on just six times earnings. Buy

Russ Mould 12 February 2019 • 5:57am

Donald Trump signs a memorandum relating to steel imports in 2017. His tariffs have increased Renold's costs at its US operations Credit: Pete Marovich/Bloomberg

Questor share tip: profits at Renold have been depressed but any recovery could start to make the stock look very cheap indeed

Fairly or unfairly, the FTSE Fledgling index has a bit of a reputation as a home to has-beens, ne’er-do-wells and never-will-bes, and some of its constituents attract little or no attention as a result. This can throw up potential value opportunities and one that could prove worthy of further research is Renold.

The company makes precision-engineered chains, couplings, gears and power transmission systems for use in heavy-lifting equipment, conveyors and even roller coasters. If something needs lifting or moving, Renold can help.

Yet the past 18 months have not been kind. The shares have slumped from around 50p to about 30p, weighed down by increased raw material prices (notably steel at its US operations, thanks to president Trump’s tariffs), rising labour costs and some production problems. In the year to March 2018, operating profits halved and restructuring costs took the company into loss.

Management has responded with a three-point plan called Step 2020. Renold is in the midst of a  cost-cutting programme that includes the closure of subscale factories. The next leg is an efficiency drive centred on a new facility in China and new resource planning software. The third step will come in the form of select acquisitions.

Last November’s interim results could have been a lot worse in the circumstances. Orders, sales and operating profits all rose, the latter despite the new investments, which are also reflected in last year’s lowly cash conversion ratio. Encouragingly, Renold enjoyed some success in pushing through price increases to compensate for the rises in input costs.

Net debt of £31m does not put undue pressure on Renold; interest cover was more than three times in the year to March 2017, even when a lot was going wrong. An additional £95m pension deficit does have to be watched but the shares trade on just six times forecast earnings at a time when profits are, in theory, depressed. Any profit recovery could make the stock look very cheap indeed.

Renold does not pay a dividend, the pension deficit is a risk and the efficiency drive rests on timely progress at the new Chinese site. A full-blown Sino-US trade war would be unlikely to help sentiment either, especially if global growth faltered as a result, but at least the poor share price performance and lowly valuation may reflect a lot of the bad news and provide some protection against further falls.

Questor says: buy

Ticker: RNO

Share price at close: 28.95p

Update: Strix

A trading statement last month from Strix, the specialist in kettle safety controls, read well and gave plenty of support to the investment thesis we set out in June last year.

The shares have already gained about 7pc since then and with the prospect of healthy dividends to come the stock looks capable of rewarding patient support.

Overall market demand seems steady enough and Strix is relocating its Chinese manufacturing facilities to help defend its bumper 38pc market share and buffer its 30pc-plus operating margins. That strong return underpins the cash flow that will fund the planned dividend of 7p for the year to December, enough for a 4.5pc yield twice covered by earnings.

Questor says: hold

Ticker: KETL

Share price at close: 153p

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Update: TalkTalk Telecom

While it was pleasing to see TalkTalk Telecom declare in a trading statement earlier this month that it would exceed its target for 150,000 new broadband customers in the year to March, the costs involved are less welcome.

The firm appears to be cutting more deals to win business. Worse, it is doing so while average revenue per user is dropping and investment is increasing, thanks to the planned  roll-out of fibre direct to households.

This means the hoped-for profit recovery appears to be even further away and it may be time to admit to having got this one wrong, swallow a nasty loss and move on. The telecoms and broadband market is a tough one and it’s just not clear whether TalkTalk’s competitive position is strong enough.

Questor says: sell

Ticker: TALK

Share price at close: 98.05p

Russ Mould is investment director at AJ Bell, the stockbroker