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Spirax's fluid pumps are in demand

Use of its pumps for Covid vaccine manufacturing has boosted both its profit and margin
Spirax's fluid pumps are in demand
  • Adjusted operating profit margin has increased 440 basis points.
  • Interim dividend per share is up 15 per cent.

Engineering company Spirax-Sarco (SPX) has been lifted up by the strong recovery of the global industrial sector. In the first half of 2021, global industrial production expanded 11 per cent, compared with a 7 per cent contraction in the same period last year. This growth in demand fuelled Spirax’s 37 per cent increase in adjusted operating profit to £162.9m.

Watson-Marlow, which provides fluid pumping technology, was a high-performing division. Its organic sales were up 35 per cent and its margin increased organically by 400 basis points to 37 per cent, driven by Covid-19 vaccine related demand. Due to the rising demand for Watson-Marlow products, the company is planning to increase capacity at its BioPure site by 50 per cent and at its Falmouth factory by 20 per cent. Given Watson-Marlow's exceptional margin, investment in this division is prudent.

One point of concern is that the company is expecting an increase in the cost of investment due to the “sharp cost inflation of raw materials and commodities within the construction sector”. However, it has historically boasted a return on total capital invested of over 20 per cent and doesn’t expect this to fall as the demand for its products is rising above initial expectations.

The 430 basis point improvement in the group operating margin to 24.8 per cent was ahead of Peel Hunt’s expectations and means it has upgraded it full-year pre-tax profit estimate by 0.4 per cent. Spirax has great momentum, but it is already trading at 42 times FactSet's consensus forecast earnings, suggesting the market is up with events. Hold.

Last IC View: Buy, 10,600p, 12 August 2020

SPIRAX-SARCO (SPX)   
ORD PRICE:15,415pMARKET VALUE:£ 11.4bn
TOUCH:15,412-15,415p12-MONTH HIGH:16,145pLOW: 10,047p
DIVIDEND YIELD:0.8%PE RATIO:55
NET ASSET VALUE:1,246p*NET DEBT:25%
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202057010610433.5
202164415014838.5
% change+13+41+42+15
Ex-div:13 Oct   
Payment:12 Nov   
*Includes intangible assets of £677m or 919p a share.