Ricardo currently has £136m of financial liquidity, significantly above our June-20 estimate of £113m. Impressively, April net debt is only £7m higher than it was in December despite the £3m dividend.
Ricardo is in a very strong financial position; we estimate that even after a difficult 2H20, where we now expect earnings to fall 60% y/y, the group will have £113m of potential liquidity. In our extreme stress-test analysis, we calculate that Ricardo can withstand over 12 months of 50% revenue declines.
Ricardo has reported 1H20 results in line with expectations, but a number of headwinds are set to impact its H2 performance, not least the coronavirus. H1 saw revenues and PBT increase by 3% and 5%, respectively, with strong performances in Energy & Environment, Defense and the inclusion of recent acquisitions.
Yesterday's AGM provided additional insight into the transformation of Ricardo into a diversified consulting and engineering business. The severe automotive downturn has seen divisional profits fall c.40% in three years, yet group profits have been flat over that period as a result of management's strategy to diversify the group and the delivery of organic and inorganic growth in these non-auto businesses.
We continue to see significant upside in Ricardo shares. Organic growth is set to accelerate in FY20, and this will be complemented by almost a full year’s contribution from both Transport Engineering and PLC Consulting, which together will add over 10% to group earnings this year.
Ricardo has delivered a resilient set of FY19 results given the continued weakness in automotive with this being offset by all other businesses. Sales were in line and, although PBT missed consensus by 3%, this was driven by automotive and is not unexpected.
We raise our FY20 EPS by 6% following the completion of the Transport Engineering acquisition. The £28.9m maximum consideration equates to a trailing EV/EBIT multiple of 8-9x, which we view as attractive for a business growing at a double-digit pace with 20% margins, twice that of Ricardo. With FY20E net debt/EBITDA of just 0.7x, there is plenty of firepower for further acquisitions in Rail and Energy & Environment.
We estimate that Ricardo’s acquisition of Transport Engineering, one of Australia’s largest rail consultancies, will be 5% accretive to FY20E EPS: we understand the business is currently growing double digits and can sustain its impressive 20% margins, which are twice as high as Ricardo. The £28.9m maximum consideration equates to a trailing EV/EBIT multiple of 8-9x, which we view as attractive.
The outlook for c.75% of Ricardo – Rail, E&E and PP – is positive, with exciting organic and inorganic opportunities over the medium term that are currently being overlooked. M&A is firmly on the agenda and our analysis suggests potential EPS accretion of 10% by FY21.
Ricardo's H1 results are in-line with last month's trading update, providing us with increased confidence of the group meeting FY19 expectations. Using historic seasonality, underlying PBT in H1 of £15.3m leaves the group well placed to meet FY19 consensus of £39.6m.
United Oil & Gas (UOG.L) an oil and gas exploration and development company brought to the Official List (Standard Segment) in July 2017 by way of a reverse takeover of Senterra Energy plc. No capital to be raised, expected market cap of £17m and expected 1 March Techniplas –global producer and support services company providing highly engineered and technically complex components, making the supply chain to original equipment manufacturers more efficient. FYDec17 rev $515m.
Companies: FA/ CGNR MERC SAR IGP RCDO MYX EMH PHC SPI
In 1H19, Ricardo has performed in line with expectations, with the well-flagged weakness in UK and US automotive markets being offset by strength in all other Technical Consulting businesses, as well as Performance Products. Ricardo's end-market diversification - which is currently being underappreciated by the market, in our view - has been demonstrated in its reassuring performance in 1H19.
FY18A results were in line with our estimates. Order intake, revenue and profit achieved record levels despite difficulties in UK Automotive, testament to the resilience and diversification now present in the business.
FY18 revenue was in-line, up 8% to c.£381m. Global Automotive orders were strong, up 22%, and xEV work increased to 21% of orders from 17%.
H1 order intake increased by 31%, from a broad range of sectors and geographies. FCF significantly improved. As a result, we upgrade our FY net debt from £42m to £35m.
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Strix has released an AGM statement indicating that trading in the early part of the year has been solid, the new financing facilities have been put in place, product development is on track with 14 new products released during the year and the factory move remains on schedule and to budget. The current trading period is an important one and the scheduled trading update 23rd July should provide more colour on the underlying performance as well as the early indications from the new products already released and the outlook for those that are scheduled to be released in H2. The resilience of the Strix business has been reaffirmed during the current situation with financial guidance having been maintained and the final dividend committed to, a 10% increase yoy.
Companies: Strix Group
Despite some initial integration issues with WatBio (since resolved), Filta generated strong organic growth (+16% YoY) and delivered results in line with expectations. Given ongoing uncertainty around the pace at which self-isolation measures will be eased, we maintain our Hold rating, and will look to reinstate forecasts once visibility improves.
Companies: Filta Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
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TClarke's trading update is refreshingly positive in all key aspects of investors' current COVID fears and hopes. The decision to fully pay the 2019 final dividend sustains income attractiveness (4% yield on the final alone), the avoidance of trading losses in the teeth of the industry lockdown period (after a profitable Q1/20) demonstrates resilience whilst maintenance of net cash balances through April and May illustrate a robustness of cash flows despite reduced activity levels. It has also maintained the order book and has moved quickly to re-structure the cost base ensuring that margin recovery is not entirely dependant upon market improvement. Prudently and we believe reasonably, we are removing all forward forecasts until visibility on revenue recovery and productivity rates into H2/20 become clearer. However, TClarke's operational strengths, financial robustness and cash coverage of dividend in the most testing of circumstances gives us renewed confidence to uphold a Buy recommendation.
FY results ahead due to a waiver of the management bonuses and final dividend is proposed. Current trading is impacted by COVID but there are clear signs of improvement.
Judges Scientific, the group focused on acquiring and developing companies in the scientific instrument sector, has announced the acquisition of UK based ‘Health Scientific Ltd', a world leading maker, and global exporter, of calorimetry instruments. The initial cash consideration equates to £5.3m, with a further £2.0m cash earnout if profits hit £1.22m in 2020. The business generated £4.4m of revenue and an adjusted EBIT of £0.88m (20% EBIT margin) to April 2019, and is expected to have an even stronger year to April 2020, suggesting a ‘6x EBIT takeout multiple' if the earnout target is hit.
Companies: Judges Scientific
In the midst of a crisis, Judges has made what we think is an excellent acquisition in a high growth sector (lithium battery testing). Heath Scientific fits all of Judges’ acquisition criteria and is a business that is well known to management. We think that the current crisis may well throw up more opportunities and, with its strong balance sheet, Judges is well positioned to capitalise on this. FY20E EPS increased by 1.8% and FY21E by 3.2%. DCF based TP raised from 5245p to 5380p. CY21E PE 26.3x. Buy.
New Equity Driving Growth
TP Group's FY19A results were in line with our expectations, with strong organic revenue growth of +16% YoY. Whilst the business remains resilient, with a large net cash position and a record order book, COVID-19 has caused uncertainty around the timing of some pipeline opportunities. Therefore, in line with a number of other companies, TP Group is withdrawing market guidance. We also withdraw our forecasts and place our recommendation Under Review.
Companies: TP Group
Costain has raised £100m of gross proceeds. We reduce FY 20 and 21 FD EPS by 45% and 59% due to the dilution.
Companies: Costain Group
In its trading update for the five months to the end of May, XP Power confirmed that it continues to see strong demand from semiconductor and healthcare customers. With demand from the healthcare sector likely to moderate in H2, and continued uncertainty in other end-markets, we maintain our revenue forecasts for FY20/21. We reduce FY20e EPS by 2.7% to reflect short-term increases in air freight costs.
Companies: XP Power
Avation is a lessor of 48 commercial aircraft to a diversified airline client base. Intra-day yesterday, the group announced that, as a result of the present uncertain backdrop caused by COVID-19, the Board had withdrawn from the previously announced strategic review and formal sale process, and that it was no longer in active discussions with any interested parties. The key reasons behind this were 1) the present uncertainty meaning that an attractive valuation was seen as unlikely to be achieved at this present moment in time and 2) the distraction of the process in the day to day operational activities of the business.
Petards supplies advanced security and surveillance systems to the Rail, Defence and Traffic Technology markets. Intra-day yesterday, the group confirmed that its RTS Solutions subsidiary had secured a multi-year renewal agreement for the provision of software support services to one of its major rail customers.
Touchstar is a supplier of mobile data computing solutions and managed services to a variety of industrial sectors. This morning, the group has released full year results to 31 December 2019, alongside providing an update on progress against the present COVID-19 backdrop. In line with the market updates provided in February and April, group revenue in the year increased by 3.2% to £7.1m, whilst revenue from continuing operations, excluding the Onboard business that was disposed of in the year, increased by 7.2% to £6.7m, driven by traction being gained with new products and services. The gross margin in the year increased by 280bps to 53.9% reflecting the greater proportion of software and service income. This resulted in a trading loss after tax before exceptionals of £89k, which post exceptionals of £412k that predominantly related to the disposal of OnBoard, resulted in a loss after tax of £501k. As previously reported, the year-end net cash position stood at £850k, which reflected an increase of £554k in the year; this post £1.1m of new product development expenditure and cash costs associated with the disposal.
Companies: AVAP TST PEG
Filta Group (Filta) announced FY’19 results pretty much in line with our numbers. Adjusted EBITDA was £3.2m, vs. our £3.3m estimate, and revenue was £24.9m, vs. our £25.1m expectation. These figures confirmed that the integration of Watbio was back on track and the business was trading well until COVID-19 struck. Most of Filta’s customers are currently closed, but the company is optimistic that they will bounce back one distancing restrictions are lifted. We have removed our 2020 forecasts.
Today's AGM trading statement guides for 1H20 profit and cash generation to be at least as strong as 1H19. On-line market share gains and swift management action on cost supports a £7.2m EBIT for 1H20.
Trading has recovered from the initial hit from COVID-19, with improving B2B activity adding to strong B2C trends. Revenue has been better than previously expected at both DX Freight and DX Express, with this now running at 10-15% below normal levels for this time of the year, compared with the initial 33% impact at the commencement of the lockdown.
Companies: DX Group