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Semiconductor shortage puts pressure on Rotork’s profits

The valve manufacturer's chief executive does not expect current supply chain disruptions to improve in the first half of 2022
Semiconductor shortage puts pressure on Rotork’s profits

Supply chain chaos is set to continue for at least the first half of 2022, said industrial valve maker Rotork (ROR), as it announced a miss on consensus sales in 2021. 

Like other industrial manufacturers, Rotork has faced persistent supply chain issues over the past year, thanks not only to semiconductor shortages but also higher prices of raw materials, lower freight availability, and labour disruptions during the pandemic. 

Unfortunately, these disruptions have more or less undone the good work of Rotork’s “growth acceleration programme”, which began in 2018, cutting costs and focusing on new product development. These efforts saw the operating margin increase by a full percentage point to 23.6 per cent in 2020, but this has since slid back to 22.5 per cent in 2021.

Operating profits fell by 6.5 per cent to £106mn in the year to 31 December, with the industrial manufacturer’s water and power division the worst hit by supply issues. The division, responsible for a quarter of total sales, saw lower sales and a 260 basis point fall in the operating profit margin, which the group aims to remedy with progressive price increases.

Even its best performing chemicals, process, and industrial division, which managed to grow revenues by 4 per cent over the year, saw a second-half slowdown as the omicron variant of the coronavirus emerged.

Kiet Huynh, who took over as chief executive in January, said the firm does “not anticipate current supply chain disruptions to improve in the first half of 2022”, but noted that end markets are improving, evidenced by Rotork’s record order book at the start of 2022.

“We remain committed to the financial objectives of mid to high single digit revenue growth and mid-20s adjusted operating margins over time and, notwithstanding geopolitical uncertainties, we expect a year of solid progress in 2022," said Huynh.

Ultimately, it will not matter how much demand from end markets picks up if Rotork cannot fulfil these orders. The firm has taken steps to increase its inventories, up 10 per cent at £68mn at the end of the year, which gives it some cushion.

Jefferies said it was “happy to remain on the sidelines for now”, reiterating its ‘hold’ recommendation, but noted the group’s strong balance sheet which allowed for a £50mn share buyback in November.

Meanwhile, Rotork is trading on a forward PE ratio of around 23.4, which makes it significantly pricier than the broader UK Industrials sector average of 18.7, according to the broker. This is a little too rich given the headwinds. Hold, for now.

ROTORK (ROR)    
ORD PRICE:316pMARKET VALUE:£ 2.72bn
TOUCH:315-316p12-MONTH HIGH:381pLOW: 291p
DIVIDEND YIELD:2.0%PE RATIO:34
NET ASSET VALUE*:62pNET CASH:£114mn
Year to 31 DecTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201764281.06.45.4
201869612110.55.9
201966912410.86.2
20206051139.806.3
20215691069.206.4
% change-6-6-6+2
Ex-div:07 Apr   
Payment:    
*Includes intangible assets of £242mn, or 28p per share

Last IC View: Hold, 345p, January 10 2022.