Rotork profits up 30% amid natural gas resurgence

Industrial flow control equipment manufacturer Rotork (ROR) is profiting from the sudden demand for energy security.

Rotork’s actuators, which provide process flow control, are used in gas and oil pipelines. Last year, revenue from oil and gas rose 15.9 per cent while adjusted operating profit was up 30.7 per cent. Increased prices usually lead to more capex investment in the industry, but this cycle is being accelerated by the war in Ukraine and countries' increased need for energy security.

Oil and gas now make up 46 per cent of revenue, with the rest split between industrial chemicals and water and power. Chemicals revenue rose 7.7 per cent but was held back by weak growth in China, while water and energy grew 10.5 per cent driven by “very strong revenue growth in India”.

Across the whole business, the adjusted operating margin expanded by 60 basis points to 22.9 per cent. This, coupled with the easing of the supply chain issues, improved cash conversion, so operating cash flow increased by 22 per cent to £133mn.

While, for now, the exposure to oil and gas is driving earnings growth, broker Shore Capital is wary of its overexposure to this market. The broker explained that Rotork’s pumps are too sophisticated to be used in other industries, which puts a limit on its growth.

Oil and gas spending is significant at the moment, but long-term prospects are also bound up with renewables. Given Rotork is currently trading on an expensive forward price/earnings ratio of 20 times, we stick to hold.

Last IC View: Hold, 300p, 8 Aug 2023