Shares in industrial chain maker Renold (RNO) have dropped 24% to 21.5p after the group issued its third profit warning in the space of seven months. On revised earnings forecasts analysts warn the shares look overvalued.
The £51 million cap had enjoyed a strong run as the market took a bet that its turnaround strategy would help get things back on track. A reassuring update alongside November's interim results convincing investors Renold would enjoy a brighter future under incoming chief executive officer Robert Purcell, who is due to take up the reins at the 148-year-old Manchester business in May, and new chairman Mark Harper who assumed the role last July.
However the firm warned second half operating profits would be lower than expected, with underlying revenue down 8.7% in the four months to the end of January. It attributed the disappointing performance to weakness in its Torque Transmission division and its North American chain business. North American revenues slipped 6.6% in the period, after experiencing 6.3% growth in the first half. A strategic review of the business is expected alongside full-year results in May.
Writing before today's market open, finnCap analyst David Buxton, who has a 'hold' recommendation on the stock and a 19p target price, said: 'On updated forecasts the shares are currently trading on a high price/earnings ratio (PE) of 19.4 times for 2013 and 2014, which we see as being overvalued. The shares are likely to see a negative reaction today, and thereafter a weak trading environment plus strategic review places the shares in no-man’s land for a while.'
Buxton forecasts 1.5p earnings per share for the year to March 2013, and the same amount for 2014. His 19.4 calculation is based on the yesterday's closing price. When you factor in that shares have subsequently fallen by a quarter this morning, Renold still trades on 14.3 times prospective earnings which many would argue remains a high rating given its trading problems.