Spirax-Sarco powers ahead

The outlook for industrial growth may be slowing, but Spirax-Sarco Engineering (SPX) is continuing to operate under its own steam.

Global industrial production grew by 2.9 per cent in the first six months of the year and Oxford Economics' full-year estimate has been cut to 3.3 per cent, from 4.4 per cent at the start of the year. Spirax-Sarco, however, posted top-line growth of 17 per cent, with its outperformance driven both by price increases and volume growth.

The company, which makes pumps, hoses and valves used to process steam and industrial fluids, reported growth of 27 per cent in its Watson-Marlow arm, underpinned by strong sales to customers in the biopharma sector. Its steam specialities arm also grew by 11 per cent as customers seek efficiency gains through reduced energy use.

Things haven’t all been plain sailing, though. It has extricated itself from the Russian market, which provided 1 per cent of sales, by selling two operating companies to managers for “nominal” sums. Its operating profit margin also shrank by 5 percentage points to 18.9 per cent, while its cash conversion ratio slumped to 44 per cent, from typical levels of around 90 per cent, due to working capital and capex commitments. A new, $106mn (£87mn) Watson-Marlow plant near Boston, Massachusetts – its biggest project to date – is at the fit-out stage and should complete by year-end.

The company’s full-year cash conversion ratio will be “somewhere in the middle” of its first half and normalised rates, chief financial officer Nimesh Patel said. Earnings will be “in line” with their more muted first-half levels.

Spirax-Sarco is a good business but is priced as such. Even after a 25 per cent sell-off this year, its shares are valued at 33-times broker Morgan Stanley’s forecast earnings of 364p a share. With the broader industrial sector hardly brimming with confidence, we don’t see much reason for them to move higher. Hold.

Last IC View: Hold, 11,825p, 11 Mar 2022