Overview
Rotork Plc (ROR) is a UK based company that is into the flow control & actuator manufacturing. In the earlier period of 1945, Rotork was a small engineering company which was acquired by David and Jeremy. The company is headquartered in Bath, the United Kingdomand operates in any market where the flow of gases and liquids needs to be controlled. The company provides its services worldwide with the help of local offices and agents which help in easy availability of Rotork’s products, supported by maintenance, repair and upgrade services. The company has wide market coverage and operates in varies industries e.g. Oil & Gas, Marine, Power Generation, Mining, Water and Sewage. The operations are divided into four divisions: Rotork Controls, Rotork Fluid Systems, Rotork Gears and Rotork Instruments. Kevin Hostetler is the current Chief Executive Officer of Rotork.


Key Statistics
 

 
 Key Shareholders
 
(Source: Thomson Reuters)

Financial Results and Review - FY2018 (£, million)
 

(Source: Annual Report, Company Website)
 
Financial Commentary – FY2018
The company reported revenue of £695.7 million for the year ending December 2018 as compared to £642.2 million in 2017 for the same period. There was an increase of 8.3 per cent in revenue, due to strong revenue growth in downstream oil and gas and industrial markets. The company’s reported adjusted operating profit had increased by 12.2 per cent in comparison with the last year mainly due to a strong revenue performance and improved gross margin. Adjusted operating profit had been increased from £130.2 million in FY2017 to £146 million in FY18. As a result of higher operating profits, adjusted operating margin surged by 70 basis points against last year. The company’s profit before tax increased to £120.7 million in FY2018 as compared to £80.6 million in FY2017. There was an increase of 49.8 per cent in profit before tax due to a decline in the interest charges on pension scheme liabilities and foreign exchange losses in FY2018. The company reported basic EPS for FY 2018 of 10.5p as compared to 6.4p in FY 2017, a surge of 64.1 per cent against last year. Adjusted basic EPS stood at 12.6p in FY 2018 as compared to 10.6p in FY 2017. The company reported a dividend of 5.90p for the year ending December 2018 as compared to 5.40p in 2017 for the same period. There was an increase of 9.3 per cent in the dividend, due to strong cash generation by the company and commitment towards progressive dividend policy.

Financial Ratios

(Source: Thomson Reuters)
 
Ratios Commentary
Gross margin reported was 44.8 per cent in the financial year 2018, reflecting a marginal decrease of 0.1 per cent when comparedwith last year data. However, the reported margin was relatively higher than the industry median. EBITDA margin of 23 per cent for the FY2018 stood considerably higher than the industry median of 13.6 per cent. Net margin reported was 13.2 per cent for the FY2018, reflecting an increase of 4.4 per cent when comparedwith last year data. Return on equity stood at 18.9 per cent which was higher than the industry median. On the liquidity front, Rotork Plc’s current ratio was higher than the industry median of 1.61, reflecting the sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio was significantly lower as compared to the industry median, reflecting that the company is less leveraged as compared to its peers.  

Share Performance

(Source: Thomson Reuters)

Share Performance Commentary
On March 07^th 2019, shares of Rotork Plc were trading at GBX 287.60, before market close, down by 1.574 per cent against its previous day closing price. Stock’s 52 weeks High and Low is GBX 363.20/GBX 232.60. At the time of writing, shares were trading 19.55 per cent lower than its 52w High and 25.62 per cent higher than its 52w low. Rotork Plc share price increased significantly by 22.77 per cent in the last three months (as at March 7, 2019), and in the last one year, the stock has delivered 10.51 per cent returns. Stock’s average traded volume for 5 days was 2,131,812.60; 30 days - 1,249,496.30 and 90 days - 1,909,256.19. The average traded volume for 5 days was up by 70.61 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 26.6x as compared to the industry median of 13.6x. The company’s stock beta was 0.96, reflecting lower volatility as compared to the benchmark index. Total outstanding market capitalisation was around £2.55 billion and a dividend yield of 2.55 per cent.

Valuation Methodology – 1

EV/Sales Multiple Approach (NTM)


While valuing Rotork Plc on EV/Sales Multiple, we have considered Next Twelve Month (NTM) EV/Sales of its peers, which were Spirax-Sarco Engineering Plc (NTM EV/Sales stood at 4.85x), Weir Group Plc (NTM EV/Sales stood at 2.19x), Halma Plc (NTM EV/Sales stood at 5.46x), Melrose Industries Plc (NTM EV/Sales stood at 3.08x), and Assa Abloy AB (NTM EV/Sales stood at 2.77x).
 
Valuation Methodology – 2

EV/EBITDA Multiple Approach (NTM) (EBITDA (FY19E) approximately)


While valuing Rotork PLC on EV/EBITDA Multiple, we have considered Next Twelve Month (NTM) EV/EBITDA of its peers, which were Spirax-Sarco Engineering Plc(NTM EV/EBITDA stood at 18.12x), Weir Group Plc (NTM EV/EBITDA stood at 13.05x), Halma Plc (NTM EV/EBITDA stood at 23.16x), Spectris Plc (NTM EV/EBITDA stood at 12.77x), and Vesuvirus Plc (NTM EV/EBITDA stood at 8.38x).

(Note: All forecasted figures and Peer selection have been taken from the Thomson Reuter).

Recent News
On 06 March 2019, Rotork Plc had given impressive numbers as compared to the last year, but its trading environment is not that promising. There had been strong operational performance, but adverse economic conditions may affect growth in 2019. Most of the sales of the company are from the Oil & Gas sector. The group through selling its non-core businesses is trying to increase its efficiency. While many favourable indexes and GDP indicators have given support for the company’s water and industrial markets.

Growth Prospects and Risks Assessments
The company has new management having a mix of new and existing talents. The company strong cash generation record and is planning for further acceleration through Merger & Acquisitions. Effects of macroeconomic uncertainty will result in slower growth. The significant risk for the company is to maintain worldwide legal and regulatory compliance.

Conclusion
The group has reported strong revenue and underline earnings for the financial year 2018. The current trading levels indicate the stock movement towards 52-week high with support coming from growth drivers like increased revenue mainly because of strong revenue from oil and gas business and improved gross margin. Based on the strong growth momentum of the company and the valuation done using the above two methods we have given a BUY recommendation at the closing price of GBX 292.2, as at March-06-19 with single-digit upside potential (based on 15x NTM EV/EBITDA on FY19E EBITDA and 3.7x NTM EV/Sales on FY19E sales).

*The buy recommendation is valid for the current price as covered in the report as on (7th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

Disclaimer
 
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