By: Stephen Timoney
31.07.2020
Investors tend to associate the most innovative companies of today with the US. However, there are many well-established and profitable businesses in the UK stock market, founded by British entrepreneurs, that are global leaders in the fields of science and technology. In the second of a three-part series on British innovation, Stephen Timoney, the Portfolio Manager of Killik & Co’s Mid Cap Equity Service, explores the past, present, and future of one of these high-growth businesses, Renishaw. Please speak to your Adviser to find out more about this company, or the wider service.
Renishaw is a leading engineering and scientific technology company, with a focus on metrology, the science of measurement. The genesis of the business was in a real-life measurement problem: gauging the size of a fuel pipe in Concorde’s Olympus engines. This was the puzzle that confronted Sir David McMurtry in his role as Deputy Chief Designer for Rolls-Royce in the 1970s – its ultimate solution was designed and built by him alone, over the course of just one weekend. His invention was the now ubiquitous touch-trigger probe, a familiar feature in factories of all sizes around the world. This clever device measures the three-dimensional coordinates of an object through electronic signals that are generated when a stylus tip gently touches various points on its surface. The sheer simplicity of Sir David’s design belied its ingenuity but, importantly, would also allow commercialisation to be achieved with relatively modest investment. However, bringing the product to market would require the help of John Deer, a colleague of Sir David’s at Rolls-Royce. The pair had met in the company’s library and soon began to recognise each other’s complementary strengths: McMurtry’s in innovation and design; Deer’s in manufacturing and sales.
They established Renishaw together in 1973, operating originally from John Deer’s home: the garage was used as the machine shop, the dining room as the office, and the spare bedroom for assembly. Three years later the business moved to its current home in Wotton-under-Edge, and in 1984, it listed on the London Stock Exchange. It took a while to wrest the touch trigger probe patent from its owner, Rolls-Royce, but McMurtry and Deer were determined to defend it vigorously from an onslaught of copycats. And so, in 1987, they bought out the patent, and through years of toil and struggle defending their IP and winning commercial acceptance for their unique product, they laid the foundations for Renishaw’s long-term success.
Today, Renishaw is valued at £3.5bn, and more than half of the company’s shares remain in the hands of its founders. Patents have been at the heart of its remarkable organic growth, allowing the business to earn a fair return on its significant investments in research and development, which amount to between 14 and 18 per cent of revenue annually.
The advantage bestowed by patents is complemented by world-class manufacturing, and the ability to provide local customer support in all its markets (95% of sales are outside the UK) posing high barriers to entry for would-be competitors. From its origins in touch-trigger probes, Renishaw has since diversified into an ever expanding range of related products, such as sensors for measuring manufactured components and finished assemblies, gauging systems for process control in manufacturing industries, calibration products that determine the positioning accuracy of a wide range of industrial and scientific machinery, and metal 3D printing for manufacturing and rapid prototyping.
In every market it enters, Renishaw aims to be the technology leader, and it takes a very long-term approach to its investments: as long as the product is clearly differentiated, with unassailable patents, it is undeterred by slow market acceptance or economic downturns. The gauging market is a good example of an area in which Renishaw has become technology leader. Its new Equator gauging system, used for manufacturing process control, is a flexible, programmable gauge in a market that has historically been served by inflexible bespoke products. Despite having a small market share, the business is ahead of the competition in this area, and there is significant growth potential for this revolutionary product.
Through its technology leadership in metrology, Renishaw is strongly positioned to play an integral role in the so-called ‘Fourth Industrial Revolution’ – the transformation of traditional manufacturing through smart and autonomous systems. Its precision measurement and process control technologies are key enablers of the ‘smart factory’ concept, in which there are fewer operators and more robots taking care of manufacturing parameters, and detecting issues during the process – not after it.
Meanwhile, software apps, developed in-house by Renishaw, further simplify the operation of its tools and systems, reducing the need for skilled operators, and opening up the potential for remote monitoring of products, predictive maintenance, and other interesting ‘internet of things’ applications. The long-term opportunity for 3D printing, meanwhile, is enormous, as it currently represents less than 1% of manufacturing, even though it has the potential for higher product performance and resource efficiency. Renishaw’s niche is in laser powder bed fusion 3D printing, and here its competitive edge is based on its manufacturing expertise: it is totally vertically integrated, while competitors outsourcing the manufacture of various components in their machines are likely to struggle with build quality as the market becomes increasingly demanding and certification more stringent.
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This note has been produced by Killik & Co on the basis of publicly available information, and all sources are believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. Some of the stocks mentioned in this note are covered by Killik & Co’s Equity Research team and others are not. The mentioning of the stocks does not represent a recommendation to buy or sell any securities, and the note is intended as a marketing communication rather than research. This note does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Nothing in this note should be construed as investment advice or as comment on the suitability of any investment or investment service. Prospective investors should take advice from a professional adviser before making any investment decisions. There are risks with almost every investment that you may not get back the original capital invested. The value of your investments may fall as well as rise and the past performance of investments is not a guide to future performance
This note has been produced by Killik & Co on the basis of publicly available information, and all sources are believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. Some of the stocks mentioned in this note are covered by Killik & Co’s Equity Research team and others are not. The mentioning of the stocks does not represent a recommendation to buy or sell any securities, and the note is intended as a marketing communication rather than research. This note does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Nothing in this note should be construed as investment advice or as comment on the suitability of any investment or investment service. Prospective investors should take advice from a professional adviser before making any investment decisions. There are risks with almost every investment that you may not get back the original capital invested. The value of your investments may fall as well as rise and the past performance of investments is not a guide to future performance.
