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Spectris designs the future of productivity

The precision instrumentation and controls specialist is undergoing an overhaul, but looks well positioned to exploit an automation-led push for efficiencies that is taking place across the business world
March 21, 2019

Both regulation and the desire to boost profits are pushing companies to invest more in energy conservation and sustainability while the increasing complexity of products in sectors such as semiconductors, industrials, automotives and pharmaceuticals is increasing demand for sophisticated testing and measurement. This should all be great news for precision instrumentation and controls specialist Spectris (SXS). However, the company's new chief executive, Andrew Heath, who was appointed last autumn, believes the group is not fully exploiting the opportunities. He is working on honing the group's focus and cutting costs to improve both margins and growth. A key update on the strategy is scheduled for June, but already progress looks encouraging.

IC TIP: Buy at 2,696p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Cost savings

Refocusing operations

Strong trends in end markets

High gross margins

Bear points

Cyclical

CLS acqusition teething troubles

The opportunity to improve returns from Spectris's operations seems clear when comparing it with peers from the FTSE All-Share Electronic Equipment and Instruments sub-sector (see table). While Spectris boasts the highest gross margin of the four companies in the sub-sector, based on S&P Capital IQ data, its operating margin is among the lowest. What's more, the shares' valuation reflects this.

PEER COMPARISONS

NameTIDMMkt capPriceFwd NTM PEEV/salesDYGross marginEbit marginROCEFwd EPS grth FY+1Fwd EPS grth FY+23m upgrade/downgrade3-mth momentumNet cash/debt (-)*
SpectrisLSE:SXS£3,110m2,696p152.12.3%57%12%14%8%5%4.2%21%£297m
HalmaLSE:HLMA£6,322m1,668p315.60.9%56%17%14%13%8%0.4%26%£195m
RenishawLSE:RSW£3,019m4,148p234.61.4%52%24%26%0%10%-5.2%-£101m
Oxford InstrumentsLSE:OXIG£593m1,036p162.01.3%52%11%14%10%6%0.0%19%£22m

Source: S&P Capital IQ

Mr Heath's aim is to grow its adjusted operating margin, which last year came in at 15.5 per cent back to the 2012 high point of 18.6 per cent. An important part of this effort is cost-cutting. Spectris aims to generate £30m of savings through an ongoing profit improvement programme, with £15m-£20m in benefits expected this year. This is on top of £25m of annualised savings expected by the end of this year from its ‘Project Uplift’ efficiency programme.

However, changes at the group go beyond lowering costs. New chief executive Mr Heath, who has recently been joined by a new finance director, is trying to focus the group's businesses on areas where it has a competitive advantage and strong long-term growth opportunities. Already, three ‘platform’ businesses have been identified, spanning instruments for science, testing and humidity measurements. These account for 60 per cent of group profit and revenue. Two of the platforms have been created by combining businesses within the group. This has already helped sales at Spectris's Malvern Panalytical unit, created through an internal merger last year, while the combination of its Hottinger Baldwin Messtechnik (HBM) and Brüel & Kjær Sound & Vibration (BKSV) divisions to create Hottinger, Brüel & Kjær (HBK) was only announced in January. The rest of Spectris’s operations remain under review, with a strategic update scheduled for June.

While the review process may still be ongoing, the company has been busy acquiring companies to enhance its platform businesses. Last year it spent £204m on three acquisitions. In particular, deals are being used to improve the ability of Spectris's divisions to offer more tech-enabled solutions. It is unfortunate that one of the recently acquired businesses – pharmaceutical outsourcing company CLS – has performed worse than expected but management believes teething problems have already been addressed. Spectris also realised £42m last year from spinning out its EMS B&K environmental monitoring business into a joint venture with Macquarie, and further disposals could well be on the cards.

SPECTRIS (SXS)   
ORD PRICE:2,696pMARKET VALUE:£3.1bn
TOUCH:2,695-2,697p12-MONTH HIGH:2,957pLOW: 1,925p
FORWARD DIVIDEND YIELD:2.9%FORWARD PE RATIO:14
NET ASSET VALUE:1067p*NET DEBT:24%
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20161.319612752.0
20171.524115556.5
20181.626616560.8
2019**1.728917770.7
2020**1.831419378.3
% change+4+9+8+11
Normal market size:750   
Beta:0.8   
*Includes intangible assets of £1.03bn, or 891p a share
**Shore Capital forecasts, adjusted PTP and EPS figures