Advanced engineering products haven’t been getting pulses racing these last few years, but in the past few months something appears to be stirring. Take Fenner, one of those seemingly typical engineering companies tucked away on the London Stock Exchange that can track its history back to Britain’s Victorian heyday but is unlikely to be doing now what its founders originally envisaged.
More than 150 years ago, it was producing leather belting in Hull for power transmission purposes and for hoses. That became the production of conveyor belts, a business that Fenner continues — and it’s still making hoses. Its headquarters remains in East Yorkshire.
Fenner’s problem has been that its belts, hoses and seals have been largely for the mining and energy industries, which have been in a slump for many years. Fenner had two choices: wait for business to tick back up but risk a failure to survive the downturn, or do something else with what it had.
Mark Abrahams, 61, the chief executive, has been at the firm a long time. He was finance director when Margaret Thatcher was prime minister. He was subsequently chief executive for 17 years, then moved (against perceived corporate governance best practice) to become chairman. When his chief executive quit because of ill-health last year, he slipped back into the main role.
As he tells it, Fenner is now reaping the reward of self-help when end-markets were not on its side — that is, using its technological knowhow in specialised advanced engineering products and precision polymers to create new products and sweep up business where industrial rivals have been standing still or quitting the sector.
It has achieved significant growth in the medical devices market, where it produces stents and heart valves. Where, in the past, it has been producing single-use medical bags, it is moving more toward biochemistry and cell therapy.
As the oil services industry goes through its big shake-out, Fenner claims that it has emerged with a greater share of business and a wider range of bespoke products for its customers. In the mining industry, project work is returning and businesses in Australia are putting in orders for more belts.
All that added up to what it reported yesterday: a 14 per cent jump in revenues to £655 million in the year to the end of September, a 59 per cent surge in underlying operating profits to £59 million and a doubling in earnings per share to 17.7p, which enabled the company to announce dividends per share of 4.2p for the year, up from 3p.
Investors reacted predictably: the shares jumped 28¼p to 365¼p. That means the stock, which is giving Fenner a market capitalisation back above £700 million, has risen by more than 50 per cent this year and has tripled in less than two years. The shares are now back to where they were in 2014.
Quite where the shares go now is a different question. Jefferies, the broker, reckons that momentum should take earnings up to 19.3p a share in the current financial year and putting a 20 times multiple on the stock comes to a target value of 390p. JP Morgan Cazenove’s price target of 345p has been overtaken. That was based on its earnings per share forecast of 19.9p, indicating a multiple calculation of 17 times.
These high ratings are more redolent of a technology stock than an engineering play. And this is a company that remains in rehabilitation and in markets that are by no means stable. Tempus has held Fenner in the past and there is no reason to change that.
Advice Hold
Why It is a company in recovery but the shares already reflect that
Game Digital
Given its recent history of disappointment, it would be all too easy to write off Game Digital as a basket case. Having collapsed into administration in 2012 only to return phoenix-like (and with half as many UK stores) to the quoted arena two years later, initial hopes of a more successful life as a PLC have since been dashed by a series of profit warnings.
Until recently, confidence was so low that the video games retailer was valued by the stock market at less than the cash of £42.6 million on its balance sheet. Things started to look up in August, when Game announced plans to tap the “significant potential” of e-sports, where professional gamers battle it out in front of crowds. Until then, the group had been almost entirely reliant on the cycle of new console releases by Nintendo, Sony and Microsoft and new game launches.
Its developing non-retail strategy should reduce that reliance, and it is pushing ahead with further openings of its Belong arenas, which are based on a South Korean concept where gaming enthusiasts pay by the hour to play on top-of-the-range PCs using the latest consoles. It has opened 18 so far, with a target of 35 by the end of this financial year and longer-term potential for at least 100.
Yesterday’s full-year results showed some promise, with sales from its e-sports, live gaming and digital activities up 116 per cent to £13.2 million, although that is still only a fraction of its group sales of £891 million. The investment in the rollout meant that losses here doubled to £6 million, although these should fall to £2 million this year.
Overall, the group’s results showed a decline in UK sales of 14.9 per cent, reflecting the maturity of the Xbox and Playstation consoles, as well as weakness in the new games release schedule, although there was a second-half improvement driven by the new Nintendo Switch console. Its poor UK performance was offset only partially by a strong performance in Spain and it fell to an adjusted pre-tax loss of £4.3 million, compared with a profit of £14 million.
It said that while it remained “committed to returning surplus cash to shareholders”, it was not paying a final dividend to invest in Belong and focus on 221 shop “lease events”.
Advice Avoid
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