Weir boss preaches resilience

A period of healthy profits when minerals markets are performing well is not unusual for engineering group Weir (WEIR), but over its 150-year-plus history it has suffered from the impact of cyclicality when such markets take a turn for the worse.

Yet chief executive Jon Stanton is looking to convince investors that the company “is a different business to the one of the past”.
The sale of an arm serving the oil and gas market two years ago reduced its exposure to the vagaries of energy markets and he argued that its mining-related revenue is more stable than many realise. 

For instance, aftermarket sales in 2022 made up 80 per cent of revenue from continuing operations. Weir's aftermarket revenue grew by a compound annual rate of around 7 per cent over the past 12 years, he added – a period which included the end of the last mining supercycle and a global pandemic.

Business over the past year was also robust, with orders increasing by 14 per cent to £2.64bn and adjusted operating profit up by 25 per cent to £395mn. The main difference between that and the 17 per cent decline in statutory pre-tax profit is a £44mn charge taken to write down the value of its Russian operations. Net cash from operations more than doubled to £321mn and its free operating cash conversion ratio rose to 87 per cent, from 63 per cent a year earlier. This was partly achieved by leaning more heavily on invoice discounting, though.

Weir is forecasting revenue growth and an uplift in adjusted operating margin from 16 to 17 per cent this year, which CFO John Heasley said was partly the result of operational leverage given efficiency improvements made over the past two years, as well as higher selling prices. Beyond next year, Weir says operating margin can rise above 17 per cent and its operating cash conversion ratio above 90 per cent as capital expenditure normalises following the completion of a foundry in China this year and other “capacity optimisation” measures are taken, such as moving US operations closer to customers and consolidating service centres in Australia. 

Broker Peel Hunt said that if Weir achieves 5 per cent revenue growth this year and delivers its margin target, earnings per share should be around 10 per cent higher than its previous forecast, at 110p a share. Yet given a 23 per cent year-to-date gain in its share price, they now trade at almost 19 times earnings, ahead of their five-year average of 16.7 times. Hold.

Last IC View: Hold, 1,578p, 28 Jul 2022