Spectris shows strong pricing power despite inflation pressures

Precision measurement company Spectris (SXS) managed to increase margins last year while still boosting like-for-like revenue by 14 per cent. Despite inflation pressures, the company showed its pricing power by increasing its adjusted operating margin by 50 basis points (bps) to 16.8 per cent.

Most of the supply chain disruptions came in the first half of the year, which lowered the gross margin. However, supply chains started to improve in the second half as the price rises fed through to the income statement, and Spectris’ margin improved.

Management is targeting an immediate operating margin of 18 per cent and a medium-term one of 20 per cent. To help achieve this, it has launched an efficiency programme called Spectris Business Systems. Despite its bureaucratic-sounding name, so far it is having a positive effect. Last year, Spectris reduced overheads by 170bps as a percentage of sales.

Life sciences, automotive and semiconductors were the strongest divisions – growing 13 per cent, 16 per cent and 15 per cent, respectively. Exposure to growth industries such as semiconductors and life sciences will create secular tailwinds and Spectris expects these to deliver its 6 per cent growth target.

Spectris’s record order book underpins broker Peel Hunt’s confidence in the business. Peel Hunt expects adjusted earnings per share (EPS) to rise to 179.8p in 2024. This would give an adjusted 2024 price/earnings (PE) ratio of 16.4, which looks affordable for a company with operating cash conversion of around 80 per cent. There is nothing here that prompts us to change our recommendation. Buy.

Last IC View: Buy, 2,943p, 1 Aug 2022