Rotork will need to find a new chief executive

Asian markets faltered during the evening prior to publication of Rotork’s (ROR) interim figures. But that can’t explain the severity of the initial markdown. Perhaps it was because chief executive officer Kevin Hostetler unexpectedly announced his intention to resign from the position next year after more than three years in the job. Rotork chairman Martin Lamb paid tribute, saying that "on leaving, he will have overseen the vast majority of this 5-year programme, which has fundamentally reshaped our core platform and processes, strengthened our management team, and positioned Rotork for a bright future".

The manufacturer of multi-use valve-automation equipment reinstated dividend payments on the back of improved results and bolstered its return-on-capital-employed by 150-basis points to 32.2 per cent. There were also positive noises on the ongoing execution of the group’s growth acceleration programme and Rotork has reported growth in headline margins. Overall, the results trumped consensus expectations against a challenging trading backdrop, so the outgoing chief executive can take it as a complement that the market attaches such value to his tenure – by mid-morning trading on results day, the shares were down by 6.5 per cent.

Rotork, in common with other industrial manufacturers, has had to contend with component shortages, and there are wider logistical issues to take on board, which makes the 20-basis point increase in the adjusted operating margin even more commendable. Management pointed to positive outcomes within its Water & Power and Chemical, Process & Industrial divisions, the latter of which posted a 23 per cent increase in adjusted operating profit to £20.6m.

The Oil & Gas division was a relative laggard with revenues down 5.6 per cent, reflecting ongoing caution on discretionary spending commitments in the upstream sector. However, group order intake in the period decreased increased 3.2 per cent on an organic constant currency basis to £298m. The lion's share of orders are driven by its customers' operational commitments rather than capital expenditure. The group estimates that maintenance, repair and automation/upgrade projects generate 75 per cent of orders. It means that the business model generally holds up better than that of many rivals when the wider economy is suffering.

Hostetler anticipates “a year of progress on a constant currency basis”. The shares change hands at 26 times Morgan Stanley’s EPS estimate of 12.7p for 2021. That may be a little rich for some tastes, but you have got to pay for quality. Buy.

Last IC view: Buy, 372p, 02 Mar 2021