Future Robotics Investments And Mac Chain Integration Will Improve Productivity

Key Takeaways

• Strategic acquisitions and investments in automation could boost productivity, operating profits, and market presence, driving future revenue and margin growth.
  
• Strong order intake and expanding market share, particularly in military contracts, signal robust demand and potential for increased revenue and earnings.
  
• Geopolitical tensions, currency impacts, and inflation challenge profitability, while acquisition risks and supply disruptions from the flood affect margins and earnings.

Catalysts

Engages in the manufacture and sale of high precision engineered products and solutions in the United Kingdom, rest of Europe, the United States, Canada, Australasia, China, India, and internationally.

• Renold's internal improvement projects, capital investments, and successful acquisitions could lead to increased operating profits and margins in the future. These initiatives are expected to drive revenue growth.
  
• The company's strong order intake, including recent military contracts, indicates robust demand, which should positively impact revenue and earnings.
  
• The acquisition strategy, particularly the integration of Mac Chain, is expected to create synergies and expand Renold's market presence, enhancing revenue and margin growth.
  
• Capital investments in robotics and automation are projected to improve productivity and reduce labor costs, potentially increasing net margins.
  
• The company's strategy to grow market share and expand in fragmented market sectors suggests potential for further revenue and earnings growth as market position strengthens.

Renold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Renold's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 9.4% in 3 years time.
• Analysts expect earnings to reach £27.0 million (and earnings per share of £0.09) by about April 2028, up from £14.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, up from 6.3x today. This future PE is lower than the current PE for the GB Machinery industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.85%, as per the Simply Wall St company report.

Renold Future Earnings Per Share Growth

Risks

• Geopolitical tensions and potential changes in tariffs, especially in the U.S., could affect import costs and profitability, possibly impacting revenue and net margins.
  
• Currency translation effects have been reducing reported revenues and profits, which could continue to affect earnings if exchange rates fluctuate adversely.
  
• The Valencia flood has created supply disruptions and resulted in an estimated exceptional cost of £1 million, impacting net earnings and margins.
  
• Continued acquisition activities carry risks of integration challenges and execution risks, which could impact expected synergies and financial returns, potentially affecting net margins.
  
• High inflation rates and labor costs could increase expenses, impacting operating margins unless these costs can be effectively passed on to customers.

Valuation

• The analysts have a consensus price target of £0.887 for Renold based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £287.7 million, earnings will come to £27.0 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 9.8%.
• Given the current share price of £0.46, the analyst price target of £0.89 is 48.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.