Hi-tech star regains allure

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The Independent Online
SIGNS are mounting that a long, dull period is over for a former glamour stock, Renishaw, as the global capital goods spending cycle heads higher. A combination of rising profits and a re-rating of the shares could produce significant capital gains for investors at the current 288p.

In the early 1980s Renishaw caught the imagination spectacularly. The shares took off in the first few months after the 1983 flotation, raising the price-earnings ratio to more than 80 as investors discounted years of fast growth to come.

But the burden of expectation proved too great. The shares crashed along with the stock market in October 1987. Although they recovered in the boom years up to 1990, they became stuck in a trading range as the recession left profits either declining or stagnating until 1994.

An important factor in the earlier enthusiasm for the shares was the genuinely hi-tech nature of the business. The co-founder, David McMurtry, who along with his partner, John Deer, still owns 53.4 per cent of the company, was formerly chief engineer at Rolls-Royce (the aerospace business) where he invented a sensitive measuring probe for specialised work on Concorde. He and Mr Deer realised the large potential and did a deal with Rolls-Royce to set up a separate company, which they joined full- time in the mid-1970s.

The surge of investor adrenalin came from optimistic speculation on a string of new products and dreams about the company's role in creating the fully automated flexible factories of the future. Like other UK manufacturers with a successful niche product, Renishaw was a global business; more than 90 per cent of its sales went overseas, in particular to Germany, Japan and the United States in their roles as the global manufacturing powerhouses.

The shares have stayed becalmed until recently because the 1990s recession, unlike that of the early 1980s, hit profits hard. Between 1990 and 1994 sales barely budged. Operating profits fell heavily from £11.3m for 1989- 90 to £4.9m for the year ended June 1993, when the group suffered the ignominy of having to issue a profits warning.

What few investors seemed to have grasped is that after these trials a new cycle of growth has begun, aided in particular by signs of strong recovery in the lagging German and Japanese economies. In 1993-94, 64 per cent of Renishaw sales went into the US, German and Japanese economies. This year the percentage will probably be even higher.

Sales growth is good news for Renishaw because of the high gross margins on its unique product range and the fixed-cost nature of the business. As one analyst pointed out, a couple of million extra in sales can easily put another £lm of profits on the bottom line.

The group has also been actively positioning itself during the bad years for a new round of strong growth. Capital and research and development spending have run consistently at more than 10 per cent of turn-over. Recent product launches selling well include scanners and the Raman microscope. Production capacity has been expanded and rationalised, and a new machining plant recently came on stream. Costs are closely monitored: all executives travel economy class.

The prospect is for years of resumed profits growth based on a much wider product range and a global investment boom. Analysts have upgraded their projections for 1994-95 from £9.5m to £11m after unexpectedly good interims. The following year could produce close to £14m, which would be a new record. Earnings per share of 14.5p and then 18p would drop the p/e to 20, followed by 16 - which looks an undemanding valuation. The group has more than £22m in cash, and there is a good chance the forecasts, will be exceeded.