Join our community of smart investors

Weir zones in on costs in a bid to boost margins

Business process transformation plan aimed at saving £30mn a year
July 28, 2022
  • Company ties up more cash in stock to service growing order book
  • Operating cash conversion rate falls to 29 per cent

Concerns about a slowdown in China’s economy has taken the heat out of some commodities markets recently, notably iron ore and copper. However, mining equipment maker Weir Group (WEIR) chief executive Jon Stanton said prices remain “well above incentive levels” required for its customers to pursue projects.

The company, which sold off its oil & gas operations to Caterpillar for $405mn (£334mn) last year to focus solely on mining, reported a 14 per cent increase in orders during the period, with demand strong across all regions, Stanton said.

Higher sales dropped through to its bottom line, although its operating margin was squeezed by 30 basis points to 15.3 per cent and its free operating cash conversion rate slipped to just 29 per cent (from 71 per cent a year earlier) as it reported a working capital outflow of £112mn. Cash was used to increase inventory “to support the higher order book, as well as some supply chain and freight disruption”, the company said.

Stanton announced a “business process transformation programme” with the aim of improving profitability. The company said that by driving 'lean' principles and centralising support functions it expects to generate annualised savings of £30mn by 2025, taking its operating margin to 17 per cent next year and above that thereafter.

Broker Shore Capital expects strong earnings per share growth to 96.8p this year, albeit falling to 93.4p next year, valuing the shares at 16.3 times and 16.9, respectively – in line with their long-run average.

As we said in March, the long-term drivers behind many of its markets are appealing but it’s difficult to make a convincing short-term case for investment. Hold.

Last IC View: Hold, 1,614p, 2 Mar 2022

WEIR (WEIR)    
ORD PRICE:1,578pMARKET VALUE:£4.1bn
TOUCH:1,577-1,579p12-MONTH HIGH:1,937pLOW: 1,321p
DIVIDEND YIELD:1.6%PE RATIO:24
NET ASSET VALUE:634p*NET DEBT:58%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
2021 **0.9010028.811.5
2022 **1.1012635.613.5
% change+22+26+24+17
Ex-div:06 Oct   
Payment:04 Nov   
*Includes intangible assets of £1.43bn, or 549p a share **From continuing operations