Broker snap: Strong order intake at Renold

15th Oct 2010 13:23

Thursday's trading update from Renold pointed to first half profits ahead of expectations and prompted FinnCap to whack its full year earnings forecast for the supplier of industrial chains and torque transmission products up by 30%.The broker now forecasts adjusted profit before tax of £5.5m for the year to end-March 2011, a significant upgrade to its previous estimate of £4m. The earnings per share (EPS) figure has been bumped up to 1.7p from 1.3p.The improvement is seen filtering through to fiscal 2012, also, with the broker upgrading its profit before tax figure for this year to £12.5m from £10.9m previously and its EPS estimate to 4.0p from 3.5p."We believe that the momentum of order intake could provide further upside to profits in the current year. As the majority of cost savings achieved over the last year have been retained, despite the increase in sales, we look for a strong improvement in operating margins to 3.8% and then to 6.7% in 2012," analyst David Buxton said.Net debt at the company has increased from £18m back at the end of March to £22m at the end of September but FinnCap thinks the increase in the debtor book is understandable given the increase in sales. "We understand nearly all the increase in debt is associated with the increase in working capital," the broker said.Based on the broker's earnings forecast for 2012 the shares trade on an earnings multiple of 8, which FinnCap thinks is "excellent value". Its price target of 55p, up from 50p previously, is based on a fair value earnings multiple of 13.8.