Rotork (LON:ROR) is taking decisive steps to determine its future size and shape. The company is not in a holding pattern awaiting a new CEO. Executive chairman Martin Lamb has taken the reins and end-market dynamics are driving a rethink in regards to innovation and the company’s operating footprint. In addition, there is a considerable opportunity to drive aftermarket activity, with the benefits of improved visibility and profitability that should provide. In the short term, management’s FY17 expectations have been maintained with stronger H2 delivery in sight; margins are expected to improve to a similar level to FY16.
H117 results reflect cost pressure on margins
Rotork delivered relatively straightforward H117 results, with revenue growth across all divisions. Group revenues grew by 13.6% in the period to £299.7m; currency contributed 11.5% while acquisitions added 2.1% leaving organic growth as flat. However, Controls, which accounts for nearly half of the group, delivered 6.3% and 2.2% organic order and top-line growth respectively. Inflationary cost pressures on labour and materials plus revenue phasing resulted in the group operating margin falling from 19.2% in H116 to 18.2% in H117. However, the company expects H217 margins to improve. End-market dynamics are starting to be more supportive in the upstream oil & gas, power, water and industrial markets, as the company’s strategy of diversifying is working. The interim dividend was increased by 5.1% to 2.05p.
Stronger momentum implied from H217
Management has maintained FY17 guidance, with a stated improvement in operating margin. While this leaves FY17 margins just in line with FY16, it should see the company taking strong momentum into 2018. The focus on the innovation funnel supports medium-term expectations with R&D as a percentage of sales set to move up from just 1.7% currently, which will be funded by driving cost efficiencies. Meanwhile, M&A remains a consideration although the current bolt-on pipeline was described as thin. Management will also address the operations footprint, the supply chain and talent development, providing full analysis for the incoming CEO. Building the aftermarket from the installed base should also support profitability.
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