Ricardo cashes in on energy transition

Ricardo’s (RCDO) website is full of eco buzzwords. The engineering consultancy is helping companies “achieve decarbonisation goals” and “advance towards net zero”, and is seeking to promote “global sustainability” and “urgent emissions action”. 

The former petrol head’s move into environmental consultancy seems to be paying off, though. Its high margin ‘energy & environment’ division is growing fast, with order intake up 37 per cent year on year. Ricardo attributed the rise to “increased demand for climate and environment-related services”.

However, it is important to note that Ricardo’s biggest segment is still ‘automotive & industrial’ (A&I), which helps global vehicle manufacturers improve the efficiency and performance of their products. And while A&I generates the lion’s share of group revenue, it declared an underlying operating loss of £1.7mn in 2021. This is better than last year’s loss of £3.4mn, but still far from encouraging.

Ricardo said Covid-19, coupled with supply chain issues, is hampering its vehicle division. However, there are signs of improvement. Order intake is up 30 per cent on the prior period at £76.7mn, and profits are typically weighted towards the second half of the financial year. Indeed, A&I’s performance has prompted brokers at Liberum to lift their division revenue and earnings forecasts by 8 per cent and 4 per cent for financial year 2023.

Between June and December 2021, the group also managed to reduce its net debt by £8.4mn to £38.5mn, reflecting a strong working capital performance. This should create more opportunities to invest for growth, and will be welcomed by the A&I division, which is expanding its research into electric vehicles and alternative fuel. Buy.

Last IC View: Buy, 420p, 15 Sep 2021