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A refinancing, an improving order book and a (well-planned) change in management are all potential triggers of interest in a stock.
Throw in a share price that is half its record high, reached in 2018, and no higher than in 2000 and more boxes are ticked. Add a little magic dust from exposure to hydrogen fuel cells and renewable energy – as a bonus, not the core investment thesis – and Ricardo merits yet further consideration.
In all honesty there is a risk that this column has dithered a bit and missed some early gains, since it has been researching the stock since last November’s £29.3m capital raising. That deal, priced at 333p, bolstered the balance sheet, although last autumn’s full-year results showed that interest cover was more than four times anyway, excluding write-downs and restructuring costs.
Last month’s first-half results showed net debt of £78m, including lease and pension liabilities. That was less than half shareholders’ funds, so gearing is low.
Nevertheless, the raising of extra funds provided Ricardo with plenty of working capital with which to operate as it sought to secure some potentially substantial contracts. This has already brought benefits in the form of a three-year, $89m (£64m) contract to retrofit critical systems in the US Army’s fleet of “mobility multipurpose wheeled vehicles”.
Those machines are due to stay in service until 2050, so this initial project potentially opens the door to more contract wins. That in turn would validate Ricardo’s strategy of positioning itself as an engineer and consultancy within a range of technical industries and not just the manufacture of automobiles.
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The latter sector is still the biggest revenue generator but it now represents less than half of sales, even including the revenues at the performance products unit, which serves supercar clients such as McLaren, Aston Martin and Bugatti.
Defence, rail, energy and the environment are all now key markets – and autos was the only one in loss during the first half, thanks to a 24pc year-on-year drop in revenues as car sales slammed into reverse and manufacturers shut down production thanks to the virus.
Covid and the downturn in the car industry have therefore weighed heavily on profits and the share price, although the damage could well have been worse without the other operations to cushion the blow. Their profits also provide a springboard for recovery as the car industry prepares for better times ahead, whether in the mass market or in niche sports cars and supercars.
If investors are looking for ways to play the “coiled spring”, as the Bank of England’s Andrew Haldane has termed the British economy as it awaits the end of lockdown, Ricardo’s exposure to big-ticket consumer items such as luxury cars could be an intriguing way to do it.
A continuing efficiency drive and improving order intake help to underpin improved profitability, although investors should note that managers expect earnings to be much more second-half weighted than usual in the fiscal year to June. That can be management speak for “unless things drop absolutely right, there’s a profits warning coming”.
A double-dip recession and a deep car industry downturn are both legitimate risks but the balance sheet offers some support, while the chief executive, Dave Shemmans, and his colleagues on the board saw fit to resume dividend payments at the interim stage with a payment of 1.75p a share.
That suggests there is at least some degree of confidence in near-term trading at the West Sussex firm.
Assessing the stock’s valuation is not entirely straightforward owing to the pandemic and restructuring costs. Ricardo’s earnings per share peaked at around 57p in the 2017 fiscal year, which is the equivalent of 47p once we account for the increased share count in the wake of last November’s sale of eight million new shares.
A multiple of less than 10 times that figure does not seem excessive, especially as this is a company with a record of double-digit operating margins and one that is valued at barely a year’s sales, even allowing for the debt, leases and pension.
Ricardo could yet offer a nugget of value.
Questor says: buy
Ticker: RCDO
Share price at close: 457p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.