Fenner’s share price has gained 200% from its 2016 trough level. But it’s worth remembering that the trough-to-peak share price move from 2009-2012 was 1,280%. The company makes polymer conveyor belts for mining and heavy industries as well as specialised polymer components for a range of applications from specialised industrial to oil and gas to medical devices. Some of these markets have been depressed in recent years, particularly the mining and energy resources segments. However, we believe that a recovery is now beginning which, like the company’s conveyor belts, will keep going and going.
In the oil & gas segment, Fenner is significantly exposed to US hydrofracking. This was the main driver for an almost 60% decline in Fenner’s O&G revenues from 2014-2016 . However, there are signs of a healthy recovery under way in this segment, and we expect a positive incremental profit contribution starting from 2017. More details of this on page 2.
Coal markets have also been a headwind in recent years. In Australia, where Fenner is clear market leader, revenues and profitability were held back by de- stocking, a lack of new projects and pricing pressures. US coal revenues for the conveyor belt business declined to a near stand-still during 2015. We expect a steady recovery from 2017 onwards, although coal is now the smaller part of the US business with the industrial business (serving the construction materials and other non-coal markets) seen as having better long-term growth prospects.
In medical, Fenner has a significant pipeline of new products and stands to benefit from the move to new and much larger facilities. The company has stated that this business segment has the potential to double its revenues organically in the next 5 years at current margins. This is a useful internally generated growth driver to add to the cyclical recoveries in other segments.
Optically the shares do not appear cheap on 22.3x PE for 2017e, or 15.4x EV/EBIT. However, we believe the earnings recovery could bring the operating profit level to £100m on a 3-5 year view. Assuming net debt and pension reduced to £125m, and applying an exit multiple of 10x EV/EBIT, this would take the share price to 450p, 58% upside from the current level.