Second-half slowdown hits Spectris

The goodwill from Spectris’s (SXS) turnaround story continued to dissipate as news of a second-half slump in sales knocked another 7 per cent off the shares on results day, albeit on the same day that hostilities broke out in Ukraine.

The shares are currently down 29 per cent from their year high in September, when the metrology group’s profit margins rose to 12.8 per cent, up from 7.4 per cent in 2019. 

This was taken as a sign of progress in simplifying the group, with management refocusing the business on the most attractive markets for Spectris’s sensors, including pharmaceuticals and electronics. 

This momentum carried through 2021 as Spectris disposed of five businesses in its food testing and industrial solutions divisions. The £685mn of net proceeds helped fund an acquisitive approach to driving margin growth, with Spectris’s latest addition, a Swiss maker of drug-discovery tools called Creoptix AG, being folded into the existing laboratory equipment business, Malvern Panalytical.

Nevertheless, supply chain issues and the onset of the omicron variant in the fourth quarter of 2022 slowed like-for-like sales growth to 10 per cent for the full year, with fourth-quarter sales growth standing at a meagre 2 per cent. This created a backlog of unfulfilled orders that bled into 2022, which management called a “frustrating end to the year”, but noted that pressures are expected to ease in the second half of 2022.

Jefferies brushed doubts aside, saying that the current record order book shows a “higher quality Spectris is emerging”. “Near-term constraints will benefit FY22F earnings, there are no demand concerns, and supply chain challenges should unwind in 2H22F,” the broker said, reiterating its ‘buy’ recommendation.

We agree, tentatively. Management’s target 18 per cent margin is within reach, hitting 16.2 per cent in 2021, and a considered acquisitive approach utilising the group’s net cash position could help boost this even further in future years. Buy.

Last IC View: Buy, 2529p, 4 Aug 2020