Dave Shemmans, the boss of automotive consultant Ricardo (RCDO), is a popular man. McLaren's boss, Ron Dennis, has offered him a car for the weekend. Bugatti says he can test drive the £1m Veyron. But Mr Shemmans is too busy running the technical consultancy and developing the technology to power the next supercar. That's the kind of commitment that will drive double-digit earnings growth and, hopefully, jump-start Ricardo's share price, too.
- Long pipeline of emissions legislation
- Car makers spending more
- Strong cash generation
- Growth and savings from AEA
- Weakness in Germany
- Slow growing order book
Clearly, Ricardo's incredibly sophisticated parts are highly prized. Already, over 2,400 engines have been delivered to McLaren, getting on for 500 transmissions to Bugatti and thousands of gear boxes go to McLaren's Formula One team every season. That's why revenue at the performance products division jumped by a quarter in the first half to £23.6m and underlying operating profit accelerated over 56 per cent to £3.6m.
Orders from Bugatti for Ricardo's dual-clutch transmission stretch out to 2014 and there's a multi-year deal supplying the Porsche race series. Building Foxhound armoured vehicles for the UK's Ministry of Defence (MoD) is highly profitable, too. Over 200 have rolled out and work on the next 100 has begun. A follow-on order for 76 more will keep Ricardo busy past Christmas, and it's talking to General Dynamics about a cheaper version, too.
Meanwhile, experts at Ricardo's technical consulting business advise governments on the likely impact of policy ideas, and vehicle makers on emissions and fuel efficiency. There's little competition here - just Austria's AVL and FEV in Germany - even though a truckload of legislation is slated for the next decade.
True, Daimler's decision to take business in-house almost halved six-month sales in Germany to £7.2m, but Ricardo's core UK market has prospered and profit at the technical consulting division fell just 11 per cent to £4.7m. Mr Shemmans says work for BMW, Audi, Chinese car makers and big power companies has improved since the first quarter and, crucially, the big car makers are spending again.
So are the Chinese and Koreans, which helps explain why the passenger cars division made up 45 per cent of orders in the first half, higher than the past two years. Advising Americans on smaller, European-style engines with lower emissions, and helping Jaguar qualify for tax breaks in China by helping fit smaller engines, is also lucrative.
RICARDO (RCDO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 399p | MARKET VALUE: | £207m | |
| TOUCH: | 398-399p | 12-MONTH HIGH: | 412p | LOW: 303p |
| DIVIDEND YIELD: | 3.3% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 168p | NET DEBT: | 3% | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 179 | 15.7 | 28.8 | 10.7 |
| 2010 | 163 | 10.8 | 20.1 | 10.7 |
| 2011 | 197 | 15.4 | 30.0 | 11.5 |
| 2012 | 197 | 17.6 | 29.3 | 12.4 |
| 2013* | 234 | 19.0 | 33.0 | 13.2 |
| % change | +19 | +8 | +13 | +6 |
Normal market size: 700 Matched bargain trading Beta: 0.5 *Investec Securities estimates | ||||
Ricardo starts the second half with £111m of orders. That's up from £107m in June, but the order book was £117m a year ago, so progress is slow. Still, developing new wind turbines, tidal stream and wave devices, and work on engines and alternative fuels for rail, should help. Having come from nothing a few years ago, these areas are now 17 per cent of the business, and growing.
And diversification was behind the decision to buy AEA Europe in November. The public sector-focused environmental consultancy has already helped grow Ricardo's UK revenue by 24 per cent to £49.8m and increase earnings. It also came with a £25m order book and valuable access to government, which should help with MoD discussions. Savings on things such as insurance, renegotiating leases and back-office mergers will come through next year, too.
What's more, Ricardo's net debt was just £2.7m in December (£7.9m in June), which includes the £18m bill for AEA. Capital spending fell by £1m and the company booked £3.7m from the sale and leaseback of German offices. Analysts at Investec Securities expect a return to net cash by year-end.
