Penny shares, by their very nature, look temptingly priced. It’s easy to imagine a stock multiplying in value over a short period of time if it can be snapped up for mere pocket change. Even so, I think it pays to be extra cautious when hunting for winners. Here are three companies that, based on traditional investing metrics, look good value to me. But are they really?

Renold 

I can currently buy shares in industrial chain supplier Renold (LSE: RNO) for just nine times earnings. That already looks a potential bargain given that the company’s customers are nicely diversified by sector and geography. However, this minnow also has a PEG (price/earnings-to-growth) ratio of 0.5. As a rule of thumb, anything at or below 1.0 tends to imply value based on that firm’s prospects. 

Recent results go some way to supporting this. Earlier this month, the company announced that it was continuing to see a recovery in revenues and orders following the pandemic. The latter rose 61.3% to almost £80m over the four months to the end of July. As such, RNO now predicts it will beat market expectations for full-year adjusted operating profit. 

This is not to say that an investment in this penny share is risk-free. The “much-lengthened supply chains” and “considerable raw material and transport cost inflation” mentioned in the last update could get worse before they get better. Even so, I reckon Renold is a cautious buy for my portfolio today.

Severfield

Severfield (LSE: SFR) produces about 300,000 tonnes of fabricated steelwork a year from its five UK sites and factory in India. This is eventually used in the construction of landmark buildings, stadiums, warehouses, hospitals and universities. London’s Shard and Wimbledon’s No.1 Court are examples. 

Right now, I can buy the shares for 11 times earnings. That compares favourably to valuations both within its industry and the market as a whole. The company also has a PEG ratio of just under 1.0. 

Then again, it’s worth me bearing in mind that demand for Severfield’s steel will clearly be linked to the overall health of the UK economy. It’s also worth noting that this has been a penny share for over nine years now. As such, I doubt this stock will fly anytime soon.

Still, it does offer a secure and decent dividend yield (3.7%). So, as a way of balancing out my more racy growth plays, Severfield appeals to me. 

Gem Diamonds

Diamond explorer and producer Gem Diamonds (LSE: GEMD) is a final penny share that, using traditional valuation measures, looks dirt cheap. It has a price-to-earnings (P/E) ratio of less than six for the current year. Other things I like are the net cash position and 3.8% dividend yield.

Then again, this low valuation isn’t a complete surprise. After all, any company in the mining sector has the potential to be highly volatile in price due to the cost and difficulty of extracting whatever metal or mineral it’s focused on. This is potentially compounded by where in the world drilling is taking place.

To be fair, GEMD digs in Botswana and Lesotho, which are considered to be generally safe. However, other risks include the growing popularity of synthetic diamonds among younger buyers.

So, while I like some of what I see here, I’m content to leave Gem Diamonds to those with stronger stomachs.

The post These 3 penny shares look dirt cheap. Should I buy? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Both companies’ shares are currently well below their previous highs. As such, there’s considerable upside potential for investors today, if they can regain their former levels. But can they do so?

Back on track

Renold’s shares are trading at 36.5p (up 5.5% today), but remain well below this year’s high of 54.5p in January. I tipped the company as a recovery stock in May at 26.5p on the view that certain problems it had suffered were short term and eminently fixable. Today’s results show the business firmly back on track, after it successfully passed on increased raw materials costs to customers and resolved some machine breakdown issues.

Revenue for the six months ended 30 September was up 6.3% at constant exchange rates. Underlying operating profit advanced 36.7%, and earnings per share (EPS) increased 44.4%. The company said it’s on course to deliver a full-year result “slightly ahead of the Board’s previous expectations.”

Prior to today’s numbers, City analysts were forecasting EPS of 4.8p for the year, while I’d pencilled-in “towards 5p.” Based on 5p, which looks reasonable, the price-to-earnings (P/E) ratio is just 7.3.

Current net debt of £31m doesn’t look too onerous versus a market capitalisation of £82m, but the balance sheet also shows a large pension deficit of £95m, down from £101m this time last year. The size of the deficit makes Renold a higher-risk stock. But the company has a multi-decade funding plan in place, and the cheap P/E and good progress of the business lead me to rate it a ‘buy’.

Equity dilution

I turned bearish on Sirius Minerals on 3 September in an article with an admittedly somewhat inflammatory title: Could the Sirius Minerals share price crash 50% by the end of the year? Much as I admired the company’s achievements to date, I felt the share price of 36p didn’t adequately reflect the risk of a dilutive equity fundraising, as part of the upcoming stage 2 financing. Reluctantly, I rated the stock a ‘sell’.

Three days later, Sirius announced it had increased its stage 2 capital funding requirement from $3bn to between $3.4bn and $3.6bn. At the same time, it said it wouldn’t seek to increase debt financing above its previous $3bn target. With the spectre of a dilutive equity fundraising entering stage left, the shares dived and are currently trading at around 23p.

When the share price was at its 45.5p high (in August 2016), there were 2.3bn shares in issue, giving Sirius a market cap of £1.05bn. Today, at 23p, the market cap is actually higher (£1.08bn), because there are now 4.7bn shares in issue. With further dilution very much in the offing after the increase in capital funding required — and there also being no guarantee lenders will agree to advance the full $3bn of debt Sirius is after — it’s hard to see the shares making a swift return to 45.5p. I’m minded to avoid the stock at this stage, and await greater visibility on the level of dilution.

The post Will the Sirius Minerals share price ever return to 45p? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

According to the update, since the beginning of May, when the firm reported a “challenging” start to its financial year, trading performance has continued to be “extremely disappointing,” and now management has “materially reduced its expectations for full-year profit before tax.“

There’s no one single factor behind Connect’s problems. The group’s three main businesses, Smiths News, Pass My Parcel and Tuffnells are all suffering from falling sales and rising costs. 

No light at the end of the tunnel 

Connect has been struggling to ignite growth for several years now and management (as well as the City and investors) had hoped that the group’s efforts to break into the last mile distribution business, via its Pass My Parcel business, would allow it to profit from the boom in online retailing.

Unfortunately, it now looks as if this dream is dead. Today, Connect has announced the closure of this business. Management is in discussion with clients to “effect as orderly withdrawal as possible.”

With Connect’s outlook only deteriorating, it’s no surprise CEO Mark Cashmore, and CFO David Bauernfeind have both decided to fall on their swords and leave the enterprise. To add insult to injury, it also looks as if the stock’s market-beating dividend yield is history. According to today’s update, the full-year 2018 dividend will now be “substantially reduced” from the rate paid in 2017. 

The last time I covered Connect, I concluded that investors should avoid the company due to its high level of debt, pension obligations and lack of cash flow to support the dividend. With the firm’s outlook only deteriorating, I continue to believe that this is the right course of action. 

A small-cap set to beat the market 

Connect may be circling the drain but one company I’m more positive on the outlook for is Renold (LSE: RNO)

Renold might not be the next Boohoo.com or Fevertree, but it looks to me as shares in this chain manufacturer are just too cheap to pass up. The stock is trading at only six times forward earnings. 

Granted, Renold isn’t without its own problems. The £71m market cap company has a net pension deficit of £82m. But this obligation declined around 5% over the past year, and should only fall further as interest rates rise. Management is also taking steps in “de-risking this position“. 

Route to growth 

Renold is currently in the midst of a transformation plan called STEP 2020, which is designed to lower costs, improve efficiency and improve sales. As well as streamlining manufacturing operations, the group is also investing in its sales force and hunting for select acquisitions. As STEP 2020 unfolds, City analysts expect earnings per share to leap 190% over the next two years. 

And it’s this growth that gets me excited. Even though Renold’s balance sheet might not be in the best shape, I believe the firm can grow out of its problems. For investors, the risks are also discounted due to the low valuation. At only six times forward earnings, the City seems to have written the business off. A slight improvement in expectations could lead to a big payoff for investors. 

The post This small-cap stock could smash the FTSE 100 this year appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Difficult period

Shares of FTSE SmallCap firm Renold (LSE: RNO) were trading at over 60p little more than a year ago. However, they reached a low of 22p recently after a difficult period for this global manufacturer of industrial chains and torque transmission products.

I believe the issues faced by the business are eminently fixable. Indeed, recovery is already under way, with the shares jumping over 10% on the release of the company’s annual results this morning. At a price of 26.5p, as I’m writing, the market capitalisation is £60m.

Improving outlook

Revenue of £191.6m for the year ended 31 March was 4.5% ahead of the prior year (3.8% ahead at constant exchange rates). Adjusted operating profit of £14.2m was down 2% due to the company being too slow to pass on increased raw materials costs to customers and some factory disruption. However, these issues have been remedied and it’s notable that £8.2m operating profit in the second half of the year was 9% ahead of the same period in the prior year.

Adjusted earnings per share (EPS) for the year came in at 4.5p, giving a P/E of 5.9, and I expect EPS to advance towards 5p this year. Net debt of £24.3m and a net debt/EBITDA ratio of 1:1 are modest and give me no cause for concern. A pension deficit of £97.4m (down from £102m over the course of the year) is substantial but I believe the outlook for such deficits shrinking is improving. While it does represent a risk, the company’s low P/E and prospects of good earnings growth lead me to rate the stock a ‘buy’.

Disaster

Shares of support services and construction firm Interserve (LSE: IRV) have fallen so far that this one-time FTSE 250 company now resides in the FTSE SmallCap index. At a share price of 74p, its market capitalisation is £110m and its P/E is 5.1 based on forecast EPS of 14.5p.

Interserve’s problems have been largely of its own making. A protracted exit from its energy-from-waste business has been particularly disastrous and is also now the subject of an investigation by the Financial Conduct Authority.

Debt millstone

It looked at one stage as if shareholders might be virtually wiped out in a massive debt-for-equity refinancing. However, new management can be credited for pulling off a deal with lenders that is significantly less dilutive than feared. The deal secured borrowing facilities of £834m to 2021, with lenders also able to buy shares at just 10p, giving them ownership of up to 20% of the enlarged equity.

Interserve’s net debt of £503m will rise considerably before any chance of improvement. Due to the size of this millstone, onerous conditions that are attached to the borrowings and the group’s weak underlying performance, I see the risk here as far too high. As such, I rate the stock a ‘sell’.

The post Interserve isn’t the only stock on a bargain P/E of less than 6 appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With that in mind, here are two shares which have experienced troubled recent pasts. Their valuations are exceptionally low and could suggest that there is capital growth potential on offer for the long run.

Difficult period

Reporting on Friday was supplier of industrial chains and related power transmission products Renold (LSE: RNO). The company’s performance since the start of October 2017 has been disappointing, with raw materials prices continuing to increase. While there has been some success in passing those costs on to customers, the realisation of these price increases has been slower than expected.

Alongside a weaker US dollar, this is putting pressure on the reported results from the company’s North American business units. As such, reported revenues are now expected to rise by 5% for the current financial year. Adjusted operating profit is due to be below previous expectations, and slightly below the reported adjusted operating profit for 2016 and 2017.

In response to its profit warning, Renold’s share price has fallen by over 15%. In the short run, a further decline in its valuation could be ahead. However, in the long run the stock appears to offer a wide margin of safety. For example, it trades on a price-to-earnings (P/E) ratio of around 8, which suggests that it could deliver improving performance. And while potentially volatile, the rewards on offer over the long run could be significant.

Return to form

Also trading on a low valuation at the present time is aerospace and defence company Cobham (LSE: COB). It has experienced a hugely challenging period which has seen profit warnings and declines in its bottom line. This has been at least partly due to difficulties in the global defence sector, with government spending reductions creating sizeable headwinds for industry operators.

Now though, Cobham seems to be on the cusp of improved financial performance. Its bottom line is due to return to growth next year after a five-year period where its earnings have moved 70% lower on a per share basis. The company’s earnings are expected to grow by 23% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.8.

Clearly, there is no guarantee that the company will be able to deliver on its upbeat forecasts. However, with an improving industry outlook and the potential for rising profitability under a refreshed strategy, the prospects for the business seem to be sound. Therefore, it would be unsurprising for its share price to continue to move higher after its rise of 12% during the last month.

The post 2 top value stocks I’d buy right now appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Renold, which manufactures and supplies chains as well as power transmission products, revealed today that management now expects adjusted operating profit for the year to 31 March 2018 to be slightly below the lower end of the current range of analyst forecasts. 

While the company does not say what the current range of forecasts is within the release, according to my research, City analysts had been expecting it to report earnings per share of 5.3p, up 16% year-on-year. 

Short-term headwinds 

It looks as if rising costs are to blame for Renold’s deteriorating outlook. The Torque Transmission division delivered growth in underlying revenue of 6.3% during the period and including the major project win for UK Couplings, underlying order intake increased by 27.4%.

Meanwhile, the Chain division delivered strong year-on-year underlying revenue growth of 8.2% in the first fiscal quarter. However, a major machine breakdown at the group’s Germany facility reduced the availability of key product lines increasing shipping and maintenance costs to mitigate the impact on key customers. As a result, revenue for the second quarter declined 4.5%.

Higher materials costs have also compressed group margins. While management is increasing prices to try and offset the impact of these costs, margins have come under pressure from the lag between raw material increases being incurred and sales price rises working through the order book.

It now looks as if Renold has controlled these issues, and the actions should begin to pay off in H2. Commenting on today’s trading update, Robert Purcell, Chief Executive, said: “It has been a frustrating first half for the Chain Division. Organic growth opportunities, particularly in Europe, have been converted but have failed to deliver the expected improvements in profitability due to issues at Einbeck and the rise in raw material prices. Management actions to address these issues are expected to benefit the second half of the year.”

It could be time to buy

As the company pushes ahead, I believe that today’s declines present a great opportunity for long-term investors to get in on Renold’s growth story. As noted above, the first half headwinds only seem to be temporary, and higher sales prices, as well as the restoration of the German facility, should mean business as usual during the second financial half. 

And even though management is now expecting the company to miss full-year forecasts, the shares still look cheap on revised figures. Assuming the firm misses the City consensus target by 10%, according to my calculations, Renold is still on track to earn 4.8p per share for the year to March 2018. This gives a forward P/E of 9.6 at a share price of 46p.

If it returns to growth and hits City targets for the following financial year (analysts are currently projecting earnings of 5.8p per share) the shares are trading at a 2019 P/E of 7.9 — a valuation some investors might find too hard to pass up. 

The post Why today’s 15% plunge attracts me to this falling knife appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The stock was last 3% lower from the prior close and moving back towards last week’s six-week troughs.

Renold announced that underlying revenues shrank 0.7% during the 12 months to March, dipping to £183.4m, while pre-tax profit dipped 9.5% to £6.7m.

Steady improvement

While last year’s results may not appear great at face value, Renold has seen its sales teams become much busier in recent months as business conditions have improved. Indeed, the Manchester business saw underlying revenues grow 2.8% during the latter half of the fiscal year, swinging from a 4% drop in the first half of the period.

And Renold chief executive Robert Purcell commented that “markets stabilised during the year and there was a return to revenue growth in the second half… along with an increase in order intake.”

Total orders rose 4.8% last year (or 1.9% on an underlying basis), thanks in no small part to exceptional recovery at the Chain division — orders here surged 11.9% during the second fiscal half.

Off the chain

Although some trading difficulties remain, I have faith that Renold can keep sales on an upward trajectory as conditions in its key markets steadily improve and its STEP 2020 transformation plan (which has bolstered investment in marketing and commercial activities and led to massive restructuring) clicks through the gears.

The City certainly expects it to wave goodbye to recent earnings trouble from this year, and a 20% bottom-line advance is chalked-in for the period to March 2018. Another 12% rise is anticipated for fiscal 2019.

While the business is clearly not without risk, I believe its ultra-low valuations bake-in such troubles and leave plenty of potential upside. As well as dealing on a forward P/E ratio of 11.3 times (inside the widely-regarded value watermark of 15 times or under), a sub-1 PEG ratio (at 0.6) underlines the engineer’s cheap price in relation to its growth prospects.

I believe recent share price weakness represents a fresh opportunity for savvy dip buyers to pile in.

Leading light

LED lighting specialist Dialight (LSE: DIA) is another recovery play setting itself up for ripping earnings expansion in the years ahead.

Although Dialight saw pre-tax losses narrow fractionally last year (to £3.8m from £3.9m previously), the company believes 2016 proved a watershed in returning it to growth. As well as bolstering its sales teams, increasing its distributor network and revamping its production model, Dialight is also investing heavily in its product ranges. It recently added the fast-growing industrial automation systems and so-called Internet of Things niches into its portfolio.

Like Renold, Dialight is also anticipated to deliver roaring double-digit earnings growth in the years ahead. A 36% advance is chalked-in for 2017, and an extra 42% increase is predicted for next year.

And while a prospective P/E ratio of 28.9 times is clearly toppy, I reckon investors should pay close attention to a PEG rating of 0.8. I reckon Dialight is a great pick for those seeking growth at bargain basement prices.

The post 2 small-caps with excellent growth outlooks appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Recovery play

TT Electronics (LSE: TTG) has had a tough few years as demand for its electronic components failed to meet earlier expectations. The company, which makes electronic components for the automotive, defence and aerospace industry, also faced operational problems with its new manufacturing facility in Romania and a number of delays in the launch of new product platforms. And as expected, these issues led to missed opportunities.

Fortunately, after nearly four years of restructuring, the company is showing some green shoots of recovery. Thanks to a combination of new product launches, cost savings and improving market conditions, TT Electronics reported double-digit percentage growth in revenues and earnings last year.

For the 2016 financial year, the company generated revenues of £569.9m, a 12% increase on the previous year. Meanwhile, pre-tax profits exceeded consensus analysts’ expectations, with the figure up 40% from last year to £26.9m, against City forecasts of £25.8m.

These results should reassure investors who had worried whether the company could turn around its fortunes after years of stagnation. Looking forward, the company advised that its order book remains sound, with revenues in line with the prior year on an organic basis.

“Despite uncertain end-markets, we enter the year with good momentum in operational efficiency improvement and a robust order book, giving us confidence of making further progress in 2017,” said CEO Richard Tyson.

The business is doing particularly well in the automotive market, with management seeing a ramp-up of new contracts and increased volumes for both sensors and control solutions over the past year.

Its shares currently trade at a forward P/E of 14.7, with City analysts expecting the firm to grow its earnings by 13% this year and a further 10% in 2018. Based on these forecasts, TT shares seem attractively valued for a company with a double-digit growth outlook.

Improving demand

Things are also looking up for engineering firm Renold (LSE: RNO), which manufactures industrial chains and related power transmission products. The company had been under pressure from soft market conditions, but is benefitting from recent sterling weakness and improving demand in Europe.

It has yet to announce its results for the year to March 2017, but it expects reported revenue for the full year to be 11.1% ahead of last year’s figure of £165.2m, with adjusted operating profits in line with market expectations.

On the downside, Renold warned of rising costs as a result of increased sales and marketing expenditures, as well as challenging trading conditions in North America. Additionally, investors need to be mindful about the company’s substantial pension deficit. Its expected net liability for pension benefit obligations is more than £60m — that’s worth roughly half its market capitalisation, and means cash pension contributions going forward will likely significantly crimp free cash flow.

However, trading on a forward P/E of 11.6, its shares seem deeply undervalued and are certainly worth considering.

The post 2 bargain growth stocks with bullish catalysts appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In terms of the challenges in Nigeria, PZ Cussons states that a lack of availability of the country’s currency at the official exchange rate is causing the majority of dollars to be purchased at a premium of 50% to 70%. This is having a detrimental impact on costs, although they’re being managed through changes to relative pricing. However, with trading conditions remaining tough in Nigeria and consumer disposable income being under pressure, the company’s ability to offset rising costs may prove to be somewhat limited in future.

Despite this, PZ Cussons could prove to be a sound long-term buy. That’s because it offers a wide margin of safety since its shares are trading on a price-to-earnings (P/E) ratio of 17.1. For a high quality consumer goods company, this rating is relatively low and could rise if the company’s outlook in Nigeria improves. While this may not take place in the short run and PZ Cussons remains a relatively risky buy, for long-term investors it could deliver upbeat capital gains.

Turning on the profits tap

Also reporting today was showers, taps and bathroom accessories supplier Norcros (LSE: NXR), with it stating that operating profit for the year is expected to be marginally ahead of market expectations. The key reason for this is strong performance in the company’s UK division, with Norcros reporting sales growth of 9.3% that contributed to group revenue growth of 6.3%.

Clearly, the performance of Norcros’ South African division was somewhat disappointing, with sales being at the same level as last year due to a weaker South African Rand. However, on a constant currency basis, Norcros’ South African operations pulled their weight, with sales rising by 15% versus the prior year.

With Norcros trading on a P/E ratio of just 7.4, it appears to offer a very wide margin of safety. And with it forecast to increase net profit by 12% this year, its shares could prove to be a strong performer over the medium term.

Power player

Meanwhile, shares in Renold (LSE: RNO) have risen by around 15% today after the supplier of industrial chains and related power transmission products said that its full year results are now expected to be slightly ahead of previous forecasts. That’s partly because of self-help measures introduced by the company that have reduced costs, and also because of volatility affecting sales less than expected. As a result, Renold expects sales to be around 1% better than previous forecasts.

With Renold forecast to increase its bottom line by 17% in the next financial year, its shares trade on a price-to-earnings-growth (PEG) ratio of just 0.4. This indicates that they could be worth buying at the present time, although continued volatility in the company’s outlook means that it remains a relatively risky buy.

The post Should You Buy PZ Cussons plc, Renold plc & Norcros plc After Today’s Updates? appeared first on The Twelfth Magpie.

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In this article I’ll explain what’s gone wrong — and ask whether today’s falls provide a buying opportunity for investors.

Hornby

Shares in Hornby fell by as much as 46% this morning, after the firm warned investors to expect a pre-tax loss of £5.5m to £6m for the financial year ending in March. That’s three times greater than the £2m pre-tax loss the firm forecast in November.

Hornby says that the problems are the result of disappointing sales and disruption caused by the restructuring of the firm’s supply chain. Together, these have had “a significant impact on the trading performance of the business”.

This explanation might be acceptable, were it not for a more serious problem.

Hornby said this morning that there’s a risk the group will breach one of its lending covenants in March. The group is in discussions with the lender to try and resolve this, but it could result in even bigger losses for equity investors if fresh cash is required.

Although Hornby raised £15m in a placing at 95p per share last June, this obviously wasn’t enough. Investors who took part in the last placing are now sitting on a 50% loss. I suspect they will be reluctant to back a second fundraising unless the new shares are issued at a massive discount to the current share price.

For shareholders who are unable or unwilling to take part, this could result in significant further losses and dilution.

Hornby’s management forecasts have proved to be highly inaccurate and now lack credibility. Until the firm’s finances have been stabilised, I would steer clear. Further falls are possible, so I wouldn’t rule out selling after today’s news.

Renold

UK engineering firm Renold has two divisions, Chain and Torque Transmission. Products include gearboxes and chains used to drive conveyor belts, which are used in a number of industries.

The group issued a profit warning today, telling investors that weak sales had continued into the second half of the year. Underlying sales are now expected to be 10% lower than last year, while adjusted operating profit is expected to fall by £2m. Based on last year’s results, this implies a figure of about £13m.

Unfortunately, Renold didn’t specify the likely impact of exceptional costs or currency effects, making it hard to predict how earnings per share are likely to pan out for the year ending 31 March.

Another concern is that net debt is expected to rise this year, although the firm says it will remain within its covenants. I estimate a year-end net debt figure of at least £25m is likely, which looks quite substantial relative to last year’s post-tax profit of £5.5m.

A final concern is that Renold has a significant pension deficit. Steps have been taken to reduce this over the last couple of years, but I expect a deficit of at least £50m to remain at the end of the year.

Renold has an uncertain outlook and a very average balance sheet. In my view, this stock isn’t an obvious recovery buy at the moment. I’d wait until we have more visibility on earnings and debt levels before making a decision.

The post Why Are Shares in Renold plc And Hornby Plc Collapsing Today? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.