What's new:
• Solid third quarter
• Expects strong end to the year
• Acquisition for its new division
Rotork had a bumper third quarter back in 2010 – but the group still managed to top that this year, with order intake up 6.5 per cent and record revenue for the period. And expectations of a strong end to the year keep the valve control systems specialist on course to match forecasts, upgraded during the summer following bullish comments alongside first-half results.
Indeed, sales are up over 13 per cent so far this year and the order book has risen more than 8 per cent year on year to £163.8m. True, central Europe and the US are a challenge, but China and India are growing fast, driving business at the core controls division. And the Middle East oil and gas industry is behind much of the improvement at the fluid systems division, where growth in order intake for 2011 is nudging 21 per cent. Return on sales of 15 per cent, however, remains elusive. Still, a decision to spend $75.8m (£49m) buying Fairchild, a US company that makes pneumatic controls and power transmission products, beefs up exposure to flow control markets and will slot into a new instruments division. It looks a good move, delivering margins of around 30 per cent and cross-selling opportunities.
Bank of America Merrill Lynch says...
Neutral. The acquisition of Fairchild looks attractive and should be a good operational fit given its asset-light business model and strong profitability. Cost synergies appear limited and oil and gas exposure is low at 17 per cent of sales, but it does fit with the longer-term shift towards a more complete flow control offering. Accordingly, we increase EPS forecasts for 2012 by 3 per cent. Rotork remains one of the highest-quality companies in European capital goods and we expect continued high value creation. Only the high relative valuation stops us being more positive.
Panmure Gordon says...
Buy. Rotork has made a bold step into a complimentary product area and, in our view, the group has marginally under paid for Fairchild. What's more, the update points to a pick up in order intake momentum from the fourth quarter. To reflect the acquisition we raise adjusted pre-tax profit estimates for 2012 by 3.4 per cent to £134m, giving EPS of 109.8p, and by 4.1 per cent for 2013 to £148.7m and 121.8p respectively – expect EPS of end-2011 of 94.3p. Based on extras revenue and margin from the acquisition, less the cash impact, we also raise the target price to 2,060p from 2010 and reiterate our buy stance.
