The engineering and industrials sector is an eclectic mix of businesses ranging from the steam-powered solutions of Spirax-Sarco (SPX) to the road safety barriers manufactured by Hill & Smith (HILS). In our last round-up in January, we noted that the biggest concern for companies in this sector was the ongoing US-China trade war. The agreement of a ‘phase one’ deal was a shot in the arm for these cyclical stocks, offering promise that global manufacturing might stage a recovery. But with the arrival of Covid-19, that progress now seems like a distant memory.
A more challenging global industrial outlook will likely weigh on IMI (IMI), whose precision engineering division provides valves and pistons for automated machinery. With factories suspending activity around the world, supply chain disruptions and lower demand for new cars, it will also feel the pain from the drop-off in global automotive production.
It’s a similar story for Bodycote (BOY), which supplies heat treatment services for vehicle components. The automotive sector accounts for more than a quarter of total revenue and it was already hampered in 2019 by a sluggish European automotive market. While the group’s defence sales might prove more robust, its operations in commercial aerospace will likely take a hit from lower demand for new aircraft in both the short and long term. Bear in mind that the £154m acquisition of Ellison Surface Technologies will now tie it further to the fortunes of the aerospace industry.
A decline in global manufacturing activity will likely drive continued weakness in steel markets, a blow for RHI Magnesita (RHIM) and Vesuvius (VSVS). RHI Magnesita produces ceramic refractory products for use in high-temperature processes, and almost 70 per cent of its sales come from steel producing and processing industries. Last year it suffered from a decline in magnesite prices and the closure of plants amid low steel prices. These difficult conditions had already carried over into 2020 before any impact from Covid-19 emerged. Now, with a slowdown in customer activity, the future demand is environment is said to be “very uncertain”.
The collapse in oil prices will be significant for Rotork (ROR), which supplies products such as ‘actuators’ for applications across the oil and gas industry. In a recent update to the market, the group said that customers in several of its end markets were planning to revisit their capital and operational expenditure commitments. Net cash of £102m as at 29 March will provide a handy cushion during this crisis, although its £60m of undrawn borrowing facilities expires in August.
As we edge closer to a global recession, the cyclical industrial stocks could be in for a further drubbing. Already battling overhanging challenges from last year, Covid-19 leaves them with a mountain to climb in 2020 and potentially beyond.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
