Engineering firm Renold is to take the axe to its cost base once again after issuing a profit warning.

The board has made a good start with the refinancing of is main bank facilities, which will bring in an immediate reduction in borrowing margins of 1.25 - 1.50 percentage points, with scope for further savings as gearing reduces.

However, the net impact of weaker demand has led the board to conclude that adjusted operating profit for the current financial year, ending March 31st 2013, will be "significantly below current market expectations and last year's result".

Renold says that despite lower sales, the forecast cash flow for the year is unchanged due to further improvements in working capital ratios and careful management of other cash flows.

The new banking facility is for four years, maturing in October 2016 and comprises a £41m multi-currency revolving credit facility with an additional £8m of ancillary loans. They have been provided by a banking group comprising Lloyds TSB and Svenska Handelsbanken.

The main covenants are the net debt/earnings before interest, tax, depreciation and amortisation (EBITDA) ratio, which has been set at a maximum of 2.5 times until maturity, and EBITDA/interest cover, which is required to be greater than 4 times until maturity.

Renold will announce its interim results for the half year ended September 30th 2012 on Tuesday, November 20th 2012.

Not surprisingly, broker finnCap expects to change its forecasts for the current year based on the latest trading update, but wants to talk to management before doing so.

"As previously signalled, weaker demand conditions in Europe are affecting the group's sales in this area. The Americas continue to see year-on-year growth (although we suspect the growth rate may well be slipping there also)," speculates finnCap's David Buxton.

"The group has once again illustrated how cyclical its markets are and furthermore just how operationally geared they are to changes in demand. The shares will clearly see significant weakness on the back of this announcement. The shares have recently been decent performers albeit off a low base. We
place our rating under review," Buxton said.

CM

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