Spirax-Sarco's revenues soar but so do costs

In the context of macroeconomic uncertainty and supply chain carnage, thermal energy management and niche pumping specialist Spirax-Sarco Engineering’s (SPX) 20 per cent revenue boom was a robust showing.

Back in February 2022 at the outset of Russia’s invasion of Ukraine, Oxford Economics forecast annual global industrial production growth of 4.4 per cent. This, in the end, came in at a lowly 2.7 per cent.

Higher volumes and prices meant that Spirax-Sarco defied the gloom. Chunky growth rates were posted across the company’s divisions of steam specialties, electric thermal solutions, and (pharma and biotech unit) Watson-Marlow.

While the latter enjoyed the best annual organic growth rate of 16 per cent, the normalisation of Covid-19 vaccine demand makes the division's prospects less certain. This is one reason that management is now a bit more cautious on the 2023 outlook. It guided for overall mid-single-digit growth this year, down from the more bullish “at least” position in November’s trading update.  

The revenue jump couldn’t prevent a fall in profitability, as operating costs rose by £268mn. The operating margin fell by 410 basis points to 19.8 per cent. Management pointed to revenue investments, the restructuring of electric thermal solutions, and acquisition costs – which pushed net debt (including lease liabilities) up by £565mn to £756mn – as drivers.

RBC Capital Market analysts said that their “underperform rating reflects the challenging absolute and relative valuations”. They added that Spirax-Sarco’s “return on invested capital is not that far above the sector”. The valuation is indeed challenging – the shares are rated at 29 times forward earnings per FactSet consensus – and we see no immediate drivers for a recommendation change. Hold.

Last IC View: Hold, 11,980p, 11 Aug 2022