‘Soggy’ chip demand weighs on Renishaw despite profit and dividend boost

Its wide variety of businesses, in terms of its customer industries and geographic markets, means that the manufacturer of precision instruments Renishaw it is a fairly fair indicator of the world economy. So both economists and stock market investors may be concerned to hear the Gloucestershire firm point to how its new financial year is seeing weak orders in a couple of key sectors, in particular, chips. silicon and electronics.

Chip shortages are often a sign of a strong economy, so a decline in demand for equipment that helps make those vital semiconductors may not be a good sign and a further drop in Renishaw’s share price extends a fading that goes back to last April.

Although the company is based in Gloucestershire, only a small percentage of the companies Renishaw uses are based in the UK and last year almost half of sales went to Asia and more than a fifth to the Americas. , and the rest to Europe, the Middle East and Africa. The FTSE 250 member also has a wide variety of industrial customers, ranging from automotive to aerospace, consumer electronics, healthcare and power generation to construction, so Renishaw has a good perspective on what what happens globally.

The company’s exposure to the silicon (or semiconductor) chip industry is particularly notable. Silicon chips are everywhere, from our smartphones to laptops, from cars to smart meters and robots to servers and computers, so if demand is strong, it’s a fair bet the global economy is doing well: Global chip sales surpassed $550 billion in 2021 and are also expected to grow at a double-digit rate in 2022.

Source: WSTS, SIA data

By extension, if chips are in short supply, manufacturers will want to make more, and to do so they will need more production equipment. This is where Renishaw comes in, as a key supplier to semiconductor production equipment (SPE) manufacturers, with global spending on chipmaking kits expected to rise by around a quarter by 2022.

However, Renishaw is now pointing to weaker order intake from this particular industry. That suggests that the demand for chips is now being sated and that the ultimate demand for those items and devices that depend on them may be slowing.

That prospect is already rattling the Philadelphia Semiconductor Index, a US-based index of 30 global semiconductor and EPS specialists. It is trading more than a third below late-2021 highs and Renishaw’s share price reflects this drop.

'Soaked' chip demand weighs on Renishaw despite rising earnings and dividends, chart 3

Source: Refinitiv data

This is despite a healthy rise in sales and earnings in the year to June 2022, when Renishaw finally met the guidance set out by chief executive Will Lee.

'Soaked' chip demand weighs on Renishaw despite rising earnings and dividends, chart 4

Source: Company Accounts, Marketscreener, Consensus Analyst Forecasts. Fiscal year to June

Markets are clearly looking ahead with some trepidation, and signs of a slowdown in some cyclical customer industries, such as semiconductors, may do little to quell those fears.

Since 1995, the company has suffered only nine profit declines in the last 25 years and all of them have come in times of slowdown or recession around the world.

Renishaw’s rare profit stumbles occurred in 1997 (Asian debt crisis), 2002 (tech bubble burst and US recession), 2007-2009 (great financial crisis) and 2013-16 (investment crisis). European debt and global growth stalling) and then in 2019-20 (as the world slowed down and covid then hit).

'Soaked' chip demand weighs on Renishaw despite rising earnings and dividends, chart 5

Source: Company Accounts, Marketscreener, Consensus Analyst Forecasts. Fiscal year to June

Mr Lee is understandably reticent to give specific guidance on sales or earnings for the year to June 2023, although an increase in the annual dividend from 2022 is a sign of confidence and Renishaw is well equipped to weather any downturn that comes. presented to you, since you have a net cash balance.

'Soaked' chip demand weighs on Renishaw despite rising earnings and dividends, chart 6

Source: Company Accounts, Marketscreener, Consensus Analyst Forecasts. Fiscal year to June

These articles are for informational purposes only and are not personal advice or recommendation.

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