Friday 16 November 2012

Renishaw (RSW) ... Reni – not so – sure

I have no doubt that Renishaw (mkt cap £1.3bn) is a very good company. But ... in the context of its limited visibility of sales, the anaemic macro backdrop, and what others in the electric component space are saying, its valuation appears bonkers.

Renishaw suggests that its “order book remains at approximately one month’s revenue.” The havoc with which this can impact on forecasts is demonstrated in figure 1, whereby consensus sales forecasts were cut by 17% over a six-month period during 2009. In line with the high operational gearing of the business, the impact of weaker sales on overall 2009 earnings was significant. 2009 earnings fell by 89% YOY.

Bloomberg consensus (figure 2) projects sales to rise by 6.5% in 2013 and a further increase of 7.3% in 2014. I reckon this to be somewhat complacent against the weak macro backdrop. Further, the group’s EBITDA margin is projected to improve to between 32-33% over the next few years. As highlighted above, operational gearing can be high in this business and so any deviation from forecast sales and the impact on profitability could be significant.

The group’s dividend is fairly modest, offering a prospective yield of 2.3%. The shares trade at a multiple of c. 5x book value and a P/E rating of 17.2x 2013 consensus earnings, falling to 16x 2014 consensus earnings. Renishaw is not cheap.

Although Premier Farnell (PFL) and Volex (VLX) both service different customers to each other and to Renishaw, I would imagine that weak underlying demand is relatively pervasive across the electrical component space. As such, I reckon the downgrades to earnings expectations for both PFL and significantly so for VLX over recent months are difficult to ignore. Perhaps more so is the close historic correlation between each company’s share price with Renishaw’s, which has dramatically broken down over recent months.

In light of the above, I can see little reason to justify a significantly higher price for Renishaw, but plenty of scope for a sizeable drop. The risk/reward here appears skewed. I shorted at 1776p/shr. 

The limited forward visibility of sales is demonstrated by the sudden drop in 2009
In the context of the weak macro backdrop, consensus sales forecasts seem complacent
RSW valuation - forward P/E rating and EV/EBITDA multiple
Volex (VLX) earnings momentum - what others in the electric component space are saying is hard to ignore
RSW and VLX share prices - the disconnect is also difficult to ignore
RSW and PFL share prices - another disconnect in the electric component space
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  1. Matthew

    An interesting take on RSW, and not one I disagree with completely, but I think your use of PFL and VLX as comps is a bit questionable as they supply very different parts of the value chain (and VLX's reduced earnings guidance is due almost exclusively to the change in the iPhone charger cord).

    I do think RSW could stumble dramatically if sales don't come through as the market expects, but I am not so sure PFL and VLX are the canaries I'd be choosing.

    1. Hi,

      I accept that the comps may be a touch tenuous. The main point I'm trying to make is how limited visibility in the space is and how I fail to see this being commensurate with RSW's valuation. Either way, I reckon RSW disappoints in Jan when it next updates. Not long to wait.


  2. The second Volex profit warning is nothing to do with Apple. Apple impacted H1's weak operating profit number. It is a cumulative effect of a number of customers pushing orders to the right and the negative operational gearing impact. Struggle to see upgrades for Renishaw in January. Renishaw is high quality but interesting to see the recent Japanese tool orders recently.