Ricardo PLC

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.

RCDO will pay a final dividend of 5.11 pence per share on 25 November 2021, while the ex-dividend date will be 03 November 2021.

Investment Rationale for Valuation – SELL at GBX 425.00

• On the profitability front, the operating margin and the net margin remained lower than the respective industry median of 9.6% and 3.7% during FY21.
• The cash conversion ratio went down from 112.9% during FY20 to 93.8% for FY21.
• During FY21, the order intake had demonstrated a significant decline of around 5%, with a closing order book of £293.5 million.
• From a technical standpoint, RCDO is hovering between the upper Bollinger band and the middle Bollinger band, indicating a correction in the stock price.
• The momentum indicator, 14-days RSI of ~62.99, is approaching the overbought territory, making it difficult for the stock price to show any upside potential.

Key Risks

• Due to its international operations, fluctuations in exchange rates could affect the profitability and balance sheet position of the Company.
• The Performance Products and Automotive related businesses got weakened and adversely impacted by the Covid-19 pandemic.
  

Recent Developments

On 26 August 2021, RCDO had appointed Graham Ritchie as the new CEO with effect from 01 October 2021.

Financial Highlights (for the full year ended 30 June 2021, as of 15 September 2021)

 (Source: LSE Website)

• With regards to the balance sheet, the Company had managed to bring down the net debt by 36% to £46.9 million.
• The revenue remained flat during FY21 despite of challenging business environment.
• Meanwhile, the Company reported a significant decline in order intake and order book during FY21.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company was unable to provide any detailed guidance for FY22. Moreover, the rail operating segment would be unlikely to witness any growth in the UK for short to medium term. Since the order book and cash conversion ratio had shown a significant decline in FY21. Hence, it would be advisable to book profit at the current levels and exit the position. The stock made a 52-week low and high of GBX 320.00 and GBX 508.00, respectively.

Based on the lower profitability as compared to the industry, decline in the order book, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Ricardo PLC at the current market price of GBX 425.00 (as on 22 September 2021 at 08:35 AM GMT+1), while we will suggest reinvesting after analysing more corporate announcements made by the Company.

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

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

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

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