Join our community of smart investors

Rotork uses its pricing power to increase revenue

The industrial manufacturing company passed on rising costs to protect its margin
February 28, 2023
  • Operating profit recovers from tough 2021
  • Increased working capital lowers cash conversion

Rotork (ROR) raised prices twice last year but still managed to sell more industrial valve actuators. Using its pricing power, it increased revenue by 13 per cent and its organic constant currency revenue by 8.4 per cent. By passing most of its cost inflation on to customers, the adjusted operating margin fell by just 20 basis points to 22.3 per cent.

These results reverse the poor performance of 2021. During the pandemic, Rotork’s revenue and profit fell as it was unable to get its hands on the semiconductors it needed. Last year, it was much better at supply chain management and bought components ahead of time, enabling it to fulfil customer orders.

The downside of this strategy is that cash conversion fell from 108 per cent to 75.9 per cent. Having a lot of components in storage is good for supply chain security but it means more working capital tied up in the business. Inventory increased by £23.9mn to £92.3mn, meaning operating cash flow dropped by £27mn to £90mn.

Despite this increase in working capital, Rotork still had £106mn of net cash and was able to increase the dividend by 4.7 per cent to 6.7p.

Broker Peel Hunt isn’t too bothered by the increased inventories and thinks Rotork has “great momentum”, pointing to an 11 per cent year-on-year increase in its adjusted order intake. The broker expects adjusted earnings per share (EPS) to rise to 13.6p in 2023, implying a price/earnings (PE) ratio of 24.1.  

The reorientation of the global energy market means there should be more investment in infrastructure and increased demand for Rotork’s valve actuators. But at this expensive price, we’d have to see it to believe it. Hold.

Last IC View: Hold, 264p, 2 Aug 2022

ROTORK (ROR)    
ORD PRICE:328pMARKET VALUE:£2.82bn
TOUCH:328p - 329p12-MONTH HIGH:343pLOW: 225p
DIVIDEND YIELD:2.0%PE RATIO:30
NET ASSET VALUE:68p*NET CASH:£106mn
Year to 31 DecTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201869612110.55.9
201966912410.86.2
20206051139.86.3
20215691069.26.4
202264212410.96.7
% change+13+17+18+5
Ex-div:13 Apr   
Payment:    
*Includes intangible assets of £249mn or 29p a share.