Rotork expands margins despite pandemic pressures

Industrial valve specialist Rotork (ROR) saw its adjusted operating profit dip by 6 per cent in 2020, to £143m, as Covid-19 weighed on large project activity, impeded access to customers’ sites and disrupted production and logistics.

Still, this profit figure came in ahead of consensus analyst expectations thanks to a 1 percentage point increase in the margin to 23.6 per cent. Margins increased across all of the group’s divisions, reflecting the benefit of its ‘growth acceleration programme’ which has been cutting costs and focusing on new product development since 2018. Thanks to these efforts, return on capital employed (ROCE) now sits at 31.9 per cent.

Slower global economic activity and a sluggish oil and gas sector meant that Rotork’s order intake dropped 15 per cent to £590m. While orders in the fourth quarter were still down year-on-year, the group says that demand started to show signs of recovery. Rotork is highly exposed to the oil and gas sector, which accounted for just under half of its revenue last year.

Rotork has increased its net cash position by more than two-thirds to £178m, despite paying out £34m-worth of dividends in September. Having opted not to declare an interim payout for 2020, it has now declared a full year dividend of 6.3p per share.

The group has warned of ongoing uncertainty in its end markets. Still, it has maintained its target of achieving mid-to-high single-digit revenue growth and an adjusted operating profit margin in the mid-20s “over time”.

While Rotork is not immune to a recession, like Spirax-Sarco (SPX), it is somewhat protected by its exposure to customers’ operating expenditure rather than more variable capital expenditure budgets. The strong balance sheet should enable it to ride out this rough patch and the group’s margin and ROCE improvements in the current environment speak to its resilience. Buy.  

Last IC View: Buy, 303p, 04 Aug 2020