'Soggy' chip demand weighs on Renishaw despite profit and dividend boost

Its wide spread of business, in terms of its customer industries and geographic markets, mean that precision instrument maker Renishaw is a pretty fair proxy for the global economy. Economists and stock market investors alike may therefore be concerned to hear the Gloucestershire firm flag how its new financial year is seeing weakness in orders in a couple of key sectors, notably silicon chips and electronics.

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

Although the company is headquartered in Gloucestershire, only a small percentage of Renishaw’s go-to firms are based in the UK and last year nearly half of sales went to Asia and more than a fifth to the Americas, with the rest going to Europe, the Middle East and Africa. The FTSE 250 member also has a wide spread of client industries, ranging from automotive to aerospace, consumer electronics to healthcare and power generation to construction, so Renishaw has a good insight into what is going on globally.

The firm’s exposure to the silicon chip – or semiconductor – industry is particularly noteworthy. Silicon chips are everywhere, from our smartphones to laptops, cars to smart meters and robots to servers and computers, so if demand is strong then it is a fair bet that the global economy is doing well – global chip sales exceeded $550 billion in 2021 and they are expected to grow at a double-digit clip in 2022 as well.

Source: WSTS, SIA data

By extension, if chips are in short supply, manufacturers will want to make more of them and to do that they need more production equipment. This is where Renishaw comes in, as a key supplier to semiconductor production equipment (SPE) makers, and global spending on chip-making kit is expected to rise by around a quarter in 2022.

However, Renishaw is now flagging a weaker order intake from this one particular industry. That suggests demand for chips is now being sated and that end-demand for those items and gadgets which rely on them is perhaps slowing down.

That possibility is already rattling the Philadelphia Semiconductor Index, a US-based index of 30 global semiconductor and SPE specialists. It is trading more than a third lower than late 2021’s highs and Renishaw’s own share price is reflecting this slump.

Source: Refinitiv data

This is despite a healthy jump in sales and profits in the year to June 2022, when Renishaw ultimately met the guidance laid out by chief executive Will Lee.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to June

The markets are clearly looking forward with some trepidation and signs of a slowdown in some cyclical client industries such as semiconductors may do little to calm those fears.

Since 1995, the company has suffered just nine drops in earnings in the past 25 years and they all came during times of a slowdown or recession around the world.

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

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to June

Mr Lee is understandably reticent about giving any specific guidance on sales or profits for the year to June 2023, although an increase in 2022’s annual dividend is a sign of confidence and Renishaw is well equipped to withstand any downturn that does come its way, as it has a net cash balance sheet.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to June

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