Stockopedia comments today - RNO18 Jul 2024 14:55
PAUL SCOTT
Renold (LON:RNO) update - re share options, etc. I spent a bit of time last night going through the accounts again for Renold (LON:RNO, in particular trying to unravel the accounting treatment of share options and employee benefit trust, dilution, etc that we were discussing yesterday. I've figured it out now. What they've done is buy shares in the open market for the employee benefit trust, to meet share option awards. I flagged this in the cashflow statement in yesterday's results, as a £4.5m cash outflow in FY 3/2024. There was nothing in FY 3/2023, however another £4.9m cash outflow called "Own shares purchased" in the FY 3/2022 cashflow statement. I would have just glanced at that, and thought good, they're doing buybacks for cancellation. But the shares are not cancelled, instead they are gifted to the employee benefit trust, which seems to be mainly share options reward schemes for Directors. That's £9.4m cash spent on buying shares to be given away (at nil cost) to Directors in the last 3 years. That seems excessive to me.
Note that the way this is accounted for, the cost completely by-passes the P&L. It took a while to track down the double entry, but it goes like this: credit cash on the balance sheet (ie cash going out, as double entry is the opposite of how we see it on our bank statements), and there where has the debit gone? It should be showing as either a cost (debit) on the P&L, or an asset on the balance sheet. Actually it's neither. The debit goes through reserves, and is shown in the reserves section of the balance sheet (below share capital) as "Other reserves". Nicely hidden! Therefore this entry lowers NAV, to reflect that RNO has spent £9.4m in cash on buying shares to give away to Directors.
The diluted EPS figure therefore seems a red herring, since the company apparently confirmed in the webinar last night (I missed it, due to being asleep in the sun) that there would not be any dilution. So I'm happy to go back to using the higher EPS figure that strips out dilution which should not happen.
Bottom line though, is by a roundabout route, a big chunk of Renold's cash has been syphoned off by management, to pay for a load of free shares for them. I'm not happy about this - the amount looks really excessive. That's cash which could have paid shareholders pleasant divis. We've had nothing over the last 3 years, whilst Directors filled their boots with £9.4m of free shares, bought by the company for them. For whose benefit is this company being run, and why did shareholders agree such a generous scheme?
To balance that, I remain very pleased & impressed with the turnaround in trading, and of course the share price, so probably shouldn't grumble too much.
I'll scrutinise employee benefit schemes more closely in the future at other companies, as it seems to me this is an effective way to hide substantial rewards for Directors in ways that wouldn't be obvious to a casual observer.
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