Ricardo weighed down by automotive division impairments

Ricardo (RCDO) closed out its half-year period with a record order book of around £410mn, with new orders of £293mn from continuing operations, up by a third on the preceding six-month period.

But the market was less than impressed by the engineering and environmental consultancy’s earnings loss, which was due to £18.7mn in impairment and restructuring charges. It was largely a non-cash measurement that stemmed from faltering performance at the Automotive and Industrial Established Mobility (A&I Established) operating segment. Management cited “increased economic uncertainty and the continuing shift in the technological landscape in the automotive sector”, although you would intuitively think that the latter point would be advantageous to the group’s business model. The operating loss at A&I Established, including one-off charges, came in at £23.5mn, but further restructuring measures, including reduced staffing numbers, are in train, so we can expect further related costs over the second half.

Rail revenue and underlying operating profit both pulled back through the period, largely due to the timing of big projects ending and new project wins and extensions commencing. Order intake was broadly flat on the prior year.

Overall performance was in line with management expectations, with sales up 12 per cent on a constant currency basis. Ricardo received £13.1mn of proceeds (net of cash disposed) for the sale of Ricardo Software. A further £2.4mn is receivable contingent on Ricardo Software achieving certain revenue targets in the 12-month period post-sale.

The deal contributed towards a net cash inflow of £4.0mn, although that reverts to an outflow when various adjustments are taken into consideration. Underlying working capital was “broadly neutral”, with reported cash conversion running at 60 per cent. Net debt at £31.4mn is down by 11.3 per cent on June’s fall-year comparator. The adjusted leverage ratio (net debt over Ebitda for the past 12 months, excluding lease liabilities) came in at 0.8 times – well inside its lenders' maximum of 3.0. And despite a turbulent year for markets, the fair value of Ricardo’s pension scheme’s assets at the end of the period was £109mn, set against obligations of £96.3mn.

Ricardo’s chief executive, Graham Ritchie, highlighted energy transition services and the group’s established US Department of Defense programme as central to growth prospects. For the time being, however, the remedial measures at A&I Established will drag on financial performance, but a forward rating of 16 times forecast earnings isn’t overly frothy given long-term structural drivers. Buy.

Last IC view: Buy, 428p, 22 Sep 2022