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Berenberg prefers “outstanding” Spirax-Sarco over rival engineers Spectris and Rotork

The German bank believes Spirax justifies its premium valuation, while it is yet to be convinced by Spectris’ and Rotork’s growth plans
steam pump
The three engineering companies are worth a combined £12bn

Berenberg has kicked off coverage on three more of the UK’s biggest industrial engineers, and analysts there have plumped for pump maker Spirax-Sarco Engineering PLC (LON:SPX) as their preferred stock, over its rivals Spectris plc (LON:SXS) and Rotork PLC (LON:ROR).

The venerable Hamburg-based investment bank has Spirax as a ‘buy’, with a price target of 10,510p – 20% higher than where the shares currently find themselves.

By contrast, Spectris and Rotork were only worthy of ‘hold’ notes, with price targets of 2,440p and 280p respectively.

READ: Spirax builds up steam but warns about slowing industrial growth

Berenberg’s chin scratchers called FTSE 100-listed Spirax an “outstanding business”, which they are telling clients to hold for the long-term.

“It has strong and resilient organic revenue growth (4-5% through the cycle), sector-high operating margins (23%), very attractive returns on invested capital (>30%), strong cash generation (90% FCF conversion) and a dividend that has increased for 51 consecutive year,” they said in a note to clients.

“It is a well-managed, quality compounder, that is highly diversified by end-market, customer, and geography and we believe it absolutely warrants the premium valuation that it trades on.”

As for FTSE 250-listed Spectris, which sells temperature and humidity measuring equipment, Berenberg believes it is too early to tell if a new management can lead a much-needed turnaround.

“Following several years of subdued financial performance, a new management team has joined the business and a strategic review is underway. This has injected some excitement into the story.”

The bank added: “Our conclusion is that Spectris can become a much-improved business, but it is very early days, and near-term trading poses several challenges.”

Rotork’s growth plans might be ‘over-ambitious’

Fellow FTSE 250 constituent Rotork, which specialises in flow control equipment, is also under the watchful eye of a (relatively) new chief executive who is in the middle of implementing “comprehensive” growth acceleration programme.

Kevin Hostetler, who joined just over a year ago, wants to return the group to mid-high single-digit revenue growth and mid-twenties margins, but Berenberg’s analysts aren’t convinced.

“Our view of this is mixed: 1) we believe the top-line target is achievable, so long as the oil price remains stable; 2) the mid-twenties EBIT margin target feels over-ambitious, and pushing too hard on costs risks damaging the business; 3) the balance sheet is one of the strongest in the sector, with firepower of up to £400mln for the right series of deals.”

Unsurpsingly, of the three companies, Spirax’s shares were the best-performing, up 2.9% to 8,775p having been boosted by a trading update on Wednesday. Rotork shares edged 1.1% higher to 290.4p, while Spectris dipped 0.6% to 2,547p.

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