Powertrains arm puts brake on Ricardo's growth

The financial results for engineering consultancy Ricardo (RCDO) suggest that its strategy of focusing on greener areas of the industry is the right one.

The company, which has historically been known for its work in the automotive market, reported top-line growth of 17 per cent and a 21 per cent rise in underlying operating profit. Moreover, it is generally the environmental and energy transition-related bits of the business reporting some of the healthiest increases in orders, revenue and margins.

Yet to describe the 12 months to June as a “good year”, as chief executive Graham Ritchie has, seems like a bit of a stretch.

Writedowns and restructuring costs mean that on a statutory level the company slipped back to a pre-tax loss of £8mn. Going off reported figures, the combined pre-tax profit over the past four years works out at just £3mn.

The main problem is its established automotive and industrial (A&I) arm, which provides powertrains for conventional vehicles and looks to be in rapid decline – revenue fell by 48 per cent on falling demand and the company took action “to rebase the business accordingly”. Headcount was cut by a quarter, and the division incurred one-off impairment and restructuring costs of £23.4mn.

Employee numbers were also reduced by a fifth in the emerging A&I business focused on propulsion systems for electric vehicles, but top-line growth of 16 per cent there fed through into much healthier margins – its operating profit near-trebled to £10.6mn.

Revenue in the energy and environment arm increased by a third, but it was the defence business that proved the star performer. Although this isn’t its biggest business – even after 80 per cent revenue growth it only makes up a fifth of the total – its operating margin continues to improve and it reported a healthy intake of new orders.

Therefore, even though the one-off profitability hit caused by the established A&I arm is disappointing, it shouldn’t weigh too heavily on Ricardo’s prospects. It has now shrunk to around 6 per cent of group revenue and its profitability is expected to improve post-restructuring, management said.

The FactSet consensus forecast is for Ricardo's adjusted earnings per share to increase by 10 per cent this year to 36.7p. Given the growth on offer, a price/earnings ratio of below 14 times doesn’t seem like a huge price to pay. Buy.

Last IC View: Buy, 559p, 1 Mar 2023