Fenner PLC - Capital Network: Flash Report

Writen by Ed Stacey

Fenner’s (FENR.LON) 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.


Drivers for 2017-2020

In the oil & gas segment, Fenner (FENR.LON) is significantly exposed to US hydrofracking. This was the main driver for an almost 60% decline in Fenner’s (FENR.LON) 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 destocking, 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.

The charts above shows the numbers of drilling rigs operational in the US. This declined sharply in 2015 and early 2016 due to the decline in the oil price. However, the rig count has inflected in the last 6 months and we believe that the more supportive stance of the new US administration should support continued recovery. In addition we understand that Fenner is enjoying an increased market share of new orders, probably due to a shift towards more high-pressure systems which suit Fenner’s product offering.

Furthermore we believe the drop-through ratio for this business is as high as 70%, meaning $10m of incremental revenue gives $7m incremental profit.

Other segments

In order to understand why we don’t consider 2016 or 2017e earnings numbers to be a good indicator of the true value of Fenner, it’s important to note the extent of the headwinds the group has faced in recent years. With most of these headwinds beginning to unwind, we see large headroom for earnings recovery.

The charts below show the revenue per customer segment, for the ECS (Engineered Conveyor Systems) and the AEP (Advanced Engineered Products) divisions. These show that the last few years have seen particularly sharp falls in the oil & gas segment for AEP, and also within the ECS division in the markets for thermal coal and for mineral ores, especially iron. We believe there are encouraging signs that equipment demand has bottomed out in the coal and iron ore segments and will begin to gradually recover. Meanwhile in oil and gas a brisk recovery already appears to be under way.

Important – Please read this information: This report has been commissioned by Fenner PLC and prepared and issued by Capital Network for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however, we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Capital Network at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. Capital Network does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Capital Network’s solicitation to effect, or attempt to effect, any transaction in a security. This document is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Capital Network has a restrictive policy relating to personal dealing. Capital Network does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Capital Network may have a position in any or related securities mentioned in this report. Capital Network or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Capital Network within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Capital Network, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

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