Weir builds margins despite cyber/Covid disruptions

Weir Group (WEIR) was the beneficiary of positive pricing in the commodities complex through much of 2021. However, the mining engineer delivered its full-year figures at a time when the global security situation was deteriorating. The group’s exposure to Ukraine and Russia is limited to around 2 per cent of net assets and 5 per cent of sales, yet management admitted that it has “created significant uncertainty about [Weir’s] operations and trading in those countries”.

Curiously, the group was subject to an attempted ransomware attack in September. The incident, along with disruption brought about by the pandemic (governmental and logistical), knocked 60 basis points off the margin, but Weir recorded an overall increase of 40 basis points in the adjusted operating margin – a creditable outcome.

Global security notwithstanding, the structural drivers for Weir’s business are intensifying. The spread of electric motoring combined with the general transition to renewable energy generation is driving demand for metals such as copper, nickel and lithium. Supply-side deficits are in the offing for these key inputs, which along with general ore grade declines and the increased necessity to mine in a more sustainable manner, should support demand for advanced mining tech over the long haul. Indeed, Weir closed out 2021 with a record backlog, driven by a 22 per cent increase in order growth year on year. Aftermarket demand also continued to improve through the year.

Expanding volumes should increase capex commitments through 2022 and beyond. Nevertheless, the group is on track to deliver a targeted 150 basis point increase in the operating margin, leading to a constant currency rate of 17 per cent in 2023. The share price has recovered since the March 2020 slide, and consensus figures point to a sizeable fall in the forward PE ratio through 1922/23, but the near-term rating is not compelling even though the long-term narrative certainly is. Hold.

Last IC View: Buy, 1,741p, 30 Jul 2021