[Nick Hargrave]

An interesting results call yesterday with a management focused on the long term strategy while dealing with a difficult near term market. While it is clear that there are inflationary and labour cost pressures everywhere that are showing no sign of abating in the coming months and could impact this year if there is a lag in pushing through price increases, the business dealt well with these challenges last year and its H2 momentum has continued into Q1 of this fiscal year

Some points to note:

The small UK acquisition from last year will pay back within 2 years, which highlights the potential value from the company’s acquisition strategy as that ramps up with larger targets going forward

Net debt is now at a 10-year+ low given the group’s strong cash generation over the last couple of years

The IAS19 pension liability in the accounts reduced by £15.3m driven by the bond yield discount rate but partially offset by an increased inflation assumption. The pension schemes have 3-5% inflation caps (average 4%) so the inflation impact is limited vs. current inflation rates. There would be a further £26m reduction if valued today. As per our note, it is key to understand it’s the cash contributions that matter rather than the ever changing IAS19 deficit, and these are consistent and manageable. With increasing profit, there is an agreed extra £1m pension contribution once profit is >£16m

The company’s geographic footprint is becoming a competitive advantage in providing local supply. Competitors in local markets have struggled with the longer supply chains in their ability to keep the market supplied, providing opportunities for Renold to take share

Germany is 9% revs but has the company’s latest single production site. It is not clear what impact energy rationing will have as it depends what form it takes (the company can withstand a 12% reduction in energy usage without impacting production, but that is different from being told that 1 day a week there needs to be a production halt). However, they’ve been working on this potential issue for months though and have contingencies in place

So there are clearly challenges, but also opportunities for a long term focused management to take advantage and we continue to be impressed with the management’s focus and pragmatism