Ricardo PLC (LON: RCDO) – Secured a three-year contract with US Army worth approximately USD 89 million. 

Ricardo PLC (LON: RCDO) is an FTSE All-Share listed Company that provides engineering, technical, environmental and consultancy services. It serves customers in the United Kingdom, the Middle East, the rest of Europe, Asia, and North America. Moreover, the clients include international financial institutions, original equipment manufacturers, the world’s major transportation and energy companies, and government agencies.

On 09 September 2021, RCDO will release FY21 results for the 12 months ending 30 June 2021.

Recent Trend of Dividend payments: The Company had paid an interim dividend of 1.75 pence per share on 09 April 2021, while the ex-dividend date was 04 March 2021. 

Growth Prospects

• Defence contract for US Army: The Defence division had secured a three-year contract worth approximately USD 89 million to deliver 9,480 ABS/ESC retrofit kits to US Army. Moreover, the first delivery would be expected by August 2021.

• Robust Order Book: RCDO had a robust closing order book of £318.2 million as of H1 FY21. Furthermore, the order book related to the Energy & Environment was strengthened by Evidence and Policy work related to the European Union's Green Deal and Defence.
• Decent Recovery in Automotive & Industrial: RCDO had shown significant improvements in the Automotive & Industrial ('A&I') segment, mainly in Europe. Moreover, the Company had witnessed accelerated progress with an increased level of orders won in the US and China during H1 FY21.
• Timely Execution of Rail projects: The projects in the Middle East remained on track, particularly the new integrated metro and tram system in Doha would gradually open before the FIFA World Cup finals in 2022.

Key Risks

• Delay in project deliveries: The delay in project deliveries can impose penalties or fines and can cause reputation damage to the organisation.
• Currency Risk: Due to its international operations, fluctuations in exchange rates could affect the profitability and balance sheet position of the Company.
• Financial Risk: The Company requires funding for making strategic acquisitions on decarbonisation and the Net Zero agenda, and any delay or failure to attain the funds could lead to delay in operations.
• Covid-19 pandemic: The Performance Products and Automotive related businesses got weakened and adversely impacted by the Covid-19 pandemic.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Ricardo PLC.  

Aviva Investors Global Services Limited is the most significant shareholder as it holds nearly 4.24 million shares as of 30 June 2021. 

H1 FY21 Financial & Operational Highlights (for the six months ended 31 December 2020, as of 25 February 2021)

(Source: Company result)

• The revenue got declined by around 15% to £164.7 million during H1 FY21.
• On the profitability front, the underlying profit before tax remained £5.0 million for H1 FY21.
• RCDO had strengthened the balance sheet as it reduced the net debt from £73.8 million as of 31 December 2019 to £50.4 million as of 31 December 2020.
• On 11 November 2020, the Company had raised net proceeds of £28.2 million. Moreover, RCDO had reported a net cash inflow of £23.0 million during H1 FY21.
• The underlying cash conversion had increased from 80.8% during H1 FY20 to 100% for H1 FY21.

Share Price Performance Analysis

 (Source: Refinitiv; Analysis done by Kalkine Group)

On 22 July 2021, at 09:43 AM GMT, RCDO’s shares were trading at GBX 382.30, up by around 0.87% from the previous day closing price. Stock 52-week High and Low were GBX 508.00 and GBX 310.00, respectively.

From a technical perspective, the 14-day RSI stood at ~41.36. Moreover, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, supporting the upside movement in the stock price.

On a YTD basis, RCDO’s stock price has delivered a positive return of ~12.40%, and it has outperformed the FTSE All-Share index (benchmark index) with a return of about 9.15%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

RCDO had delivered decent H1 FY21 results with growth in operating profit for Energy & Environment and Rail division. The performance products division had fared well, in line with the expectations during H1 FY21. Furthermore, the Company would continue to explore new opportunities with accelerated investments in decarbonisation and the Net Zero agenda. Moreover, in clean energy solutions, the Company would witness the transition away from fossil fuel-based internal combustion engines and focus more on electrification and hydrogen. Overall, the Company would deliver long term growth for shareholders driven by a robust order book, good pipeline of opportunities and a diversified business platform. 

Considering the decent H1 FY21 financial performance, improved liquidity profile, solid order book, recently won US Army contract, reduction in net debt, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Ricardo PLC at the current price of GBX 382.30 (as on 22 July 2021 at 09:43 AM GMT), with lower-double digit upside potential based on 14.44x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.