My presentation from Wednesday provoked some controversy on whether the calculation of the 122p on this slide was correct:
https://twitter.com/MelloEventsUK/status/1729924967460995321
There are issues with this slide, not least of which is that the “total” at the top of the page isn’t correct, and for that (and the other points that I glossed over) I beg your forgiveness. I finished these slides at 2am on the Wednesday morning and I didn’t have the chance to double-check them. The overall point that I was trying to make was simply that Renold’s equity valuation would be materially higher if it traded inline with the rest of the sector. Of course, the 122p number is spuriously accurate but I genuinely think that that’s the sort of ballpark re-rating that the stock deserves given time. For the sceptics I would add that I was also chastised in the bar for NOT being optimistic enough - one fellow shareholder told me that they expected Renold to “ten-bag over the next few years” and that I was too pessimistic!
Let me start with the basic EV formula so that we are all on the same page:
Enterprise Value = market value of equity + market value of debt - cash
Combining this with EBITDA you can derive the multiple EV/EBITDA, which you would broadly expect to be consistent for companies within an industry (and large differences should be explainable).
My first assertion was that EV should include the pension fund deficit. I don’t think that this is a particularly controversial point and a quick search on Google reveals that at least Phil Oakley agrees with me (see here).
If we also assume that the market value of the debt is par value then the formula simplifies since “market value of debt - cash” simply equals “net debt”. Hence the EV formula that I propose is:
Enterprise Value = market value of equity + net debt + pension fund deficit
In the case of Renold this is £72.6m + £28.3m + £52.7m = £153.6m
And the EV/EBITDA multiple can be calculated as £153.6m / £41.8m = 3.7x
I then calculated a median sector average from the Stockopedia data of 8.6 and said that *IF* we were to use that multiple then that would imply a share price of 122p a share. This leap is where I lost a couple of people who…
