- Operating margin continues expansion
- Management expects around 6 per cent medium-term growth
Spectris’ (SXS) margin expansion is impressive, but the shrinking order book has raised some concern.
Spectris’ precision measurement business is diversified across a few industries, which provides a degree of resilience. Life sciences customers contribute 18 per cent of revenue, followed by “technology-led industrials” with 16 per cent and semiconductors with 12 per cent. The rest is made up by automotive, materials and academic research.
In semiconductors, Spectris’ equipment is used for contamination monitoring and is benefiting from the global investment in new semiconductor plants. Correspondingly, semiconductor revenue rose 19 per cent. Management says order book growth has normalised against strong comparators, but is forecasting 6 to 8 per cent medium-term growth.
The strong performance from the rest of the business helped offset life sciences, where revenue dropped 9 per cent. The company said this was due to a normalisation of customer ordering following an “exceptionally strong” performance in the past few years. However, management is confident ageing populations will drive its 5 to 7 per cent medium-term growth forecast.
The most promising aspect of the results was the margin expansion. The adjusted operating margin grew 130 basis points to 18.1 per cent. Management credited increased pricing, improved supply chain efficiency and rationalisation of the portfolio for this improvement. While these are quite general reasons, the proof is in the pudding, and the company is delivering on its margin promise. The aim is to hit 20 per cent in the coming years.
Not everyone is happy, though. Broker Shore Capital is sceptical of Spectris’ growth promises. The order book dropped 5 per cent, meanwhile, and the company expects next year’s growth to be weighted to the second half of the year, which is often a red flag. With a forward price/earnings ratio of 17, Shore said the valuation looks “full”.
However, even if growth does slow, the consistent margin expansion will help it keep growing profits. We stick to buy.
Last IC View: Buy, 3,482p, 31 Jul 2023
| SPECTRIS (SXS) | ||||
| ORD PRICE: | 3,539p | MARKET VALUE: | £3.57bn | |
| TOUCH: | 3,540p - 3,545p | 12-MONTH HIGH: | 3,884p | LOW: 2,917p |
| DIVIDEND YIELD: | 2.2% | PE RATIO: | 25 | |
| NET ASSET VALUE: | 1303p | NET CASH: | £76mn | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2019 | 1.63 | 259 | 202 | 65.1 |
| 2020 | 1.34 | -4.10 | -14.6 | 68.4 |
| 2021 | 1.16 | 374 | 295 | 71.8 |
| 2022 | 1.33 | 152 | 107 | 75.4 |
| 2023 | 1.45 | 186 | 140 | 79.2 |
| % change | +9 | +22 | +31 | +5 |
| Ex-div: | 16 May | |||
| Payment: | 28 Jun | |||
