Rotork delivered broadly in line with FY17 expectations. Order book growth was encouraging while FY17 adjusted operating margin moved up from H117 to close to FY16 levels. Kevin Hostetler will take over as CEO from 12 March, completing the management transition in a timely manner. Determination to bring the company back to former growth and margin prospects is evident. The route map for the next three to five years is underpinned by investment in R&D and front-end services ensuring Rotork delivers a valuable proposition to its customers as end-markets improve.
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Rotork |
Investment driving growth
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Industrial engineering |
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8 March 2018 |
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Rotork is a client of Edison Investment Research Limited |
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Rotork delivered broadly in line with FY17 expectations. Order book growth was encouraging while FY17 adjusted operating margin moved up from H117 to close to FY16 levels. Kevin Hostetler will take over as CEO from 12 March, completing the management transition in a timely manner. Determination to bring the company back to former growth and margin prospects is evident. The route map for the next three to five years is underpinned by investment in R&D and front-end services ensuring Rotork delivers a valuable proposition to its customers as end-markets improve.
FY17 results delivered to expectations
Rotork reported FY17 revenue growth in all divisions and in all end-markets. FY17 revenues of £642.2m (FY16: £590.1m) represented 2.3% organic growth and were ahead of consensus expectations of £637.9m. Controls (51% of group sales) grew orders and revenue by 6.9% and 3.3% organically respectively, with momentum visible in North America and EMEA. At the group adjusted pre-tax level, £124.8m (FY16: £117.9m) fell slightly short of consensus expectations of £124.9m, however FY17 adjusted EPS of 10.6p (FY16: 10.0p) was in line with consensus. FY17 dividend of 5.4p (FY16: 5.1p) represented a 5.9% increase and cover of 1.2x.
Outlook supported by end-markets and investment
FY17 order growth was 8.2% at constant currency, demonstrating the momentum in the business while building visibility. Rotork sees improving end-markets and expects mid- to high-digit revenue growth at constant currency in 2018 with similar margins to 2017. At current exchange rates, however, the company sees a 4-5% headwind y-o-y. Oil and gas markets are improving, especially in small to mid-size projects. It is important to recognise the investment Rotork is making to address its core markets, with 20% uplift in R&D and 15% increase in IT expected in FY18. This supports product innovation and improving front-end services. In addition, the company continues to focus on the aftermarket opportunity. Over one million Rotork actuators in operation globally have been generating usage data for the last decade. While in 2017 the number of actuators under maintenance agreements grew by 8%, there is clear opportunity to drive further aftermarket growth.
Valuation: Investing for growth
We believe that innovation is central to earnings growth. The company is focused on a smooth medium-term delivery with transparency on costs and underlying performance. End-market analysis is shaping the strategic review, while any future M&A would support the diversification of the portfolio.
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Consensus estimates
Source: Bloomberg. Note: PBT and EPS adjusted for amortisation of intangible assets and other adjustments. |
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Disclaimer
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Disclaimer
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Research: Healthcare
Oryzon is ramping up its R&D programme and plans to conduct a total of four mid-stage clinical trials with lead assets ORY-1001 (a specific LSD1 inhibitor for cancers) and ORY-2001 (a dual LSD1/MAOB inhibitor for CNS indications). If all goes according to plan, data readouts are expected from all four trials in 2019 and these key catalysts are reachable with current cash, as per our calculations. The most advanced studies are the two Phase IIa trials with ORY-2001 in multiple sclerosis (MS) and Alzheimer’s disease with the MS study, SATEEN, enrolling patients since January 2018. Our valuation is marginally higher at €315m or €9.2/share.