Small Talk: Renold rides high to overcome manufacturing woes

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The most recent Markit/Cips barometer of activity in Britain's manufacturing sector was far from inspiring. It showed that, after displaying strength at the start of the year, the sector suffered a slowdown last month.

Although still expanding (the reading for March remained comfortably above the 50-point mark dividing expansion from contraction) both growth and new orders came under pressure.

It was against this disheartening backdrop that Renold, the Manchester-based engineering firm, issued its pre-close trading update last week, and lifted the mood of investors and analysts alike with news of better-than-expected profits. Although small – Renold is worth about £80m – the company represents the kind of manufacturing success story that is often forgotten in the haze of headlines bemoaning the loss of the UK's industrial strength.

The business supplies high-performance chains, gears, couplings and the like to a whole host of sectors. The applications are varied, with Renold's components featuring in everything from rollercoasters at Alton Towers to escalators across the London Underground.

Last week's update showed that Renold's sales maintained their momentum in the second half of its financial year, with annual sales finishing a healthy 19 per cent higher than a year ago in constant-currency terms. Order intake climbed by more than 20 per cent, with underlying order books closing 13 per cent higher for the year.

Divisionally, the chains business put in a strong performance, with full-year sales rising by 26 per cent, following a 31 per cent jump in the first half of the year. The news on the balance sheet was also positive, with Renold saying that net debt had declined by nearly 20 per cent since September as it returned to generating cash.

Unsurprisingly, analysts were quite pleased, with FinnCap saying that, even though its forecasts were already at the top end of the market range, it was upgrading its profits estimate to reflect the strength evidenced by the release.

The broker also highlighted the investment opportunity, as Renold's share price has proved out of step with the company's performance. Why? FinnCap pins the weakness on nervousness before the trading update, along with some profit- taking and the impact of technical issues. This suggests that investors may now begin to see some upside gains.

"Both customers and competitors have continued to illustrate the strength of Renold's markets and decent pace of recovery, so the share price weakness was at odds with their underlying market trends," the broker said. It added that the pull-back had "opened up an opportunity to buy in at compelling values".

Hydrogen shows recovery signs

The economic recovery remains sluggish and the unemployment picture is still far from encouraging. But things have improved, particularly for recruiters, who endured a sudden downturn as the world tumbled into recession.

The comeback was evident in the recent preliminary figures from Hydrogen, a recruitment company, headquartered in the City of London, which specialises in mid- and senior-level roles. Net fee income – a key industry barometer – was up 64 per cent last year, climbing to nearly £30m from about £17m in 2009. Hydrogen was, of course, careful not to overstate the recovery, with the executive chairman, Ian Temple, saying that although it had done well, and while the business had seen growing confidence over 2010, "visibility in the global recruitment markets" continued to be limited.

The hint of caution was prudent, as the economic outlook remains changeable. But Hydrogen seems well placed to capitalise on improving market trends, not least because of its growing international focus, with the company having placed "candidates in over 40 countries" over the past year.

This global focus was honed during the downturn, and the group now has offices in Australia and Singapore. A new Hong Kong branch is set to open its doors today, which should help the company to achieve its target of generating 50 per cent of net fee income from outside the UK by 2012.

But that is only part of the story. As Seymour Pierce analysts noted at the time of the results last month, the group's strategy is not merely limited to going global. It is also developing new disciplines, making a foray into the engineering sector at the end of 2008 and more recently moving into the pharmaceuticals space.

This is clearly one to watch as economic trends improve.