What's new:
■ Auto growth outside Europe
■ Upgrade potential
■ Large cash pile
Ricardo (RCDO) shares were firing on all cylinders again in the run-up to what was an encouraging third-quarter update. Customer activity has increased since February's interim results and business is going to plan, says the engineering consultancy. Confirmation of a recovering automotive market outside mainland Europe is bullish, too, and earnings upgrades beckon if it steers clear of trouble in the final few weeks of the year.
Crucially, Ricardo is winning new contracts with three big American carmakers - Ford, General Motors and Chrysler - and is being kept busy in the UK, Russia and the Far East, especially Japan. Yes, Europe is weak, but Germany is recovering and engine work on power generation and rail projects diversify the technical consulting division. A new order for 76 Foxhound armoured vehicles and building McLaren engines is driving the performance products unit.
Environmental consultancy AEA, bought in November, is living up to expectations, too, helping increase revenue by 15 per cent in the eight months to April and settle the order book at £130m. It was 3 per cent and £101m, respectively, without it. If there were any surprises, it was magicking £2.7m of net debt into £11.3m net cash in just four months. Only some is earmarked for a new test facility.
Investec Securities says…
Buy. Ricardo is benefiting from a recovery in automotive markets outside Continental Europe and an increasingly well-diversified revenue base. The order book is solid, Ricardo-AEA has performed as expected and management impressed on cash generation again. We forecast full-year underlying pre-tax profit of £20.9m and underlying EPS of 33p, but believe the pre-close update could drive upgrades should current trading conditions prevail through the final weeks of the financial year. Trading at what we view as an unwarranted discount to the broader consulting sub-sector, and with the business trading well, we keep our rating and multiples-derived target price of 465p.
Nomura says…
Buy. Revenue growth in the existing operations is marginally lower than our forecasts, but the resumption of orders from major car manufacturers is a new and positive development for the next financial year. The cash performance is also encouraging ahead of our expectations for £5.3m of net debt at the year-end, and is only partly due to the £3.7m sale and leaseback of the German offices. With the shares trading on a June 2013 PE ratio of around 12, we continue to see Ricardo as cheap and reiterate our buy recommendation and 550p price target.
