Ricardo looks set to weather short-term turbulence

The automotive and industrial (A&I) arm of Ricardo (RCDO) is still causing problems. The engineering consultancy managed to grow sales by 5 per cent in the six months to 31 December, but adjusted operating profit slipped by 4 per cent to £12mn. 

Management blamed this on delayed customer orders in A&I – which covers both “emerging mobility” and “established mobility”. Both divisions reported adjusted operating losses and tumbling order intakes.

Elsewhere, however, business is booming. The rail, energy & environment and defence businesses all managed to grow revenues and profits in the period, and the order book is up 15 per cent year on year at £477mn – a record high for the firm. Defence is doing particularly well, with order intake more than doubling to £114mn.

The key question for investors is whether Ricardo – which used to focus on internal combustion engines – has proved it can successfully pivot to greener forms of engineering, or whether there is still a big question mark over its business model. 

So far, the transition has been lumpy: write-downs and restructuring costs pushed the company into a pre-tax loss last year, and it reported a statutory loss before tax of £2.1mn today. The market is clearly nervous, with the shares down 12 per cent since the start of the year. 

However, there are reasons for optimism. Management noted improved A&I sales activity and growth in the second quarter of the year and expects the division to return to profit in the second half. Meanwhile, the other segments of the business are growing nicely and underlying cash conversion is excellent at 130 per cent. 

Much will depend on the next six months, and it’s possible that A&I still has some nasty surprises up its sleeve. We think that Ricardo is diversified enough to weather any short-term turbulence, however. Buy. 

Last IC View: Buy, 510p, 13 Sep 2023