Weir's margins widen

Weir Group (WEIR) has seen its fair share of ups and downs over the course of its long history and it was unlikely that market turbulence caused by a lack of Russian orders and volatile resources prices would ruffle the company. And it has proved in its half-year results as the Glasgow-based pump manufacturer benefited from price rises, resilient demand in its core minerals division and an ongoing restructuring programme meant that reported operating margins rose by 22 per cent to 16.3 percentage points, not far from management’s target of 17 per cent. The results saw both a big rise in profit, as well as a free operating cash rate that reached 90 per cent.

Against a backdrop where manufacturing output has been falling in the UK, Weir keeping the order book stocked was vital for the company’s performance for the year. The picture was mixed, although cash conversion improved considerably, order intake looked a bit slow at 2 per cent, with total orders now up to £1.33bn.

Management noted that: “While there is growing intent amongst miners to develop large expansion projects, conversion of the pipeline remains slow, so our customers met demand by maximising production from existing assets.” In other words, demand for spares as customers sweated their machinery helped Weir to keep on track. In this scenario, the £30mn of savings that Weir hopes to make by 2025 through its “Performance Excellence” programme will be key to maintaining its margins.

Consensus puts Weirs' EPS at 111p for 2023, which translates into a price/earnings ratio of 17. Rarely a cheap share, unless there is a general market collapse, Weir’s pedigree is reflected in that price, which currently does not imply value. Hold.

Last IC View: Hold, 2,047p, 1 Mar 2023