Rotork Plc

Rotork Plc (LON: ROR) is a UK based company that is into the flow control & actuator manufacturing. The company provides its services worldwide with the help of local offices and agents which help in easy availability of Rotork’s products and supported by maintenance, repair and upgrade services.

The group will announce its H1 FY2020 results on 4^th August 2020.

Measures Taken to Tackle Covid-19 Pandemic
On 31^st March 2020, Rotork released an update on the response taken to fight coronavirus. The group is focused on ensuring the health and wellbeing of its employees, suppliers, customers and stakeholders. Due to imposed travel restrictions and lockdown to contain the spread of virus, the market outlook become more uncertain. The group witnessed decent demand for its products and services and  continue to make delivery. In the last few weeks, the company started experiencing an increase in the disruptions. At the beginning of the year, the outbreak in the Chinese region delayed the deliveries and logistics costs increased; however, the output from the China-based factory has returned to normal. The factories in the Malaysia and India are currently closed as per government guidelines. The operations in the Italian region has been impacted and employees are working from home. The factories in the UK and the US are working at reduced capacity. The company has taken various required steps to preserve cash, reduce costs, freezing recruitment and skipping salary increases. The Board has also decided not to pay any dividend until the situation stabilises. The group has a strong balance sheet with decent cash generation capability. The net cash stood at around GBP 110 million as at 29^th March 2020 and  undrawn revolving committed facility of GBP 60 million. The company is in discussions with banking institutes for extending credit facility and applied by CCFF scheme launched by the UK government. At present, the group is not able to quantify the impact of uncertainty and will provide further guidance once the situation gets normal.

Share Price Performance

Daily Chart as of May 5^th, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Rotork Plc shares were trading at GBX 245.00 at the time of writing before the market close (at 2:44 PM GMT+1) on 5^th May 2020 and up by 1.91% versus the previous day closing price. Stock's 52 weeks High is GBX 344.70 and Low is GBX 177.05.
 
Valuation Methodology


*Peers: Spirax-Sarco Engineering Plc, Spectris Plc, IMI Plc and Smiths Group Plc.

Growth Catalysts
The company’s strong cash generation record is planning for further acceleration through Merger & Acquisitions.The group has managed to mitigate the negative impact on operational and financial performance through improved cost structures and operational efficiency.

Conclusion
The group is focusing on improving its operational efficiency. New contracts, growing global refining industry and increasing demand for energy could provide ample growth opportunities for the company. The company’s wide range of end-user markets, manufacturing capabilities, and its strong business performance of Controls and Fluid Systems segments are its major strengths.  With the benefits from the Growth Acceleration Programme, the group continue to make cost benefits with site improvement. The group witnessed the impact of the outbreak on the global operations in the month of March and has taken all required steps to tackle the uncertain situation. The operations in China has resumed to normal, and factories in the UK are opened after a temporary closure.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 590.10 million in FY16 to GBP 669.30 million in FY19. Compounded annual growth rate (CAGR) stood at 4.29 per cent.

Based on the above rationale and support from valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 240.40 (as on 4^th May 2020) with high single-digit upside potential based on 23.80x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.

*The “Buy” recommendation is also valid for the current price as covered in the report (as on 5th May 2020).

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