UK Edition
Questor: back the self‑help strategy of the new chief executive and take a stake in Rotork
Questor share tip: the control systems company hopes to recapture its glory days when margins peaked at 26pc, says James Ashton
A so-called period of reflection resulted in a swift end to chief executive Peter France’s 28-year career at Rotork.
That was two years ago, when the company, led by Martin Lamb, the chairman, judged it needed a change of personnel to step up its growth rate and profit margins at a time when the broader economic environment was doing the engineer no favours.
In came Kevin Hostetler, an American who had most recently shaken up FDH Velocitel, a telecoms and engineering consultancy, and advised several private equity firms on boosting performance. His most relevant posting was a divisional role at Idex Corporation, a pumps-and-valves maker.
Despite the fuss when he swapped Chicago for Bath to lead Rotork, the shares have gone pretty much nowhere since he arrived in March last year.
Rotork supplies “actuators” – or control systems – to manage flows of liquids, gas and powders in the oil and gas, water and chemicals industries. It was founded in 1957 by Jeremy Fry, a colourful inventor and scion of the eponymous chocolate family who mentored Sir James Dyson in his early years.
The ambition today is to recapture some former glories – not as far back as in Fry’s days, but just to 2014 when margins peaked at 26.4pc. That is easier said than done, given that the oil and gas sector contributes more than half of group sales and it is easier to predict the Brexit outcome than to call the next move for the oil price.
Still, Mr Hostetler’s strategy is one of self-help: he thinks that 70pc of the road back to those chunky margins is in management’s own hands. Interim figures in August suggested some signs of progress. While the top line declined by 4pc on an underlying basis, the margin strengthened by 1.3 percentage points to 21.1pc.
The sales fall looks troubling until you consider some large orders from Asia that came through in the comparable period last year. But it is true that end markets have been tough for a while as energy firms took an axe to spending and many big projects remain on the back burner. Rotork sales are expected to be flat this year.
- Sign up to the Telegraph's Questor WhatsApp group for daily alerts and exclusive audio updates
- Sign up to our new City Intelligence newsletter for incisive comment on the day's biggest business stories
- Read Questor’s rules of investment before you follow our tips
By contrast, the margin result may have been flattered by a better performance by controls, the highest margin of four divisions. What is clear is that Mr Hostetler’s “growth acceleration programme”, a five-year plan running to 2023, is beginning to have an impact too. Much of what he advocates is dull but important stuff: reorganising sales teams, tightening up the supply chain and reducing stock levels to create a simpler business.
Behind him stands Mr Lamb, who brings a solid reputation from his time leading IMI, the valve maker.
Analysts at Stifel, the broker, point to a better second half, helped by Rotork’s strength in the Asian downstream market, where pipeline activity remains healthy, and lighter exposure to US shale, where delays have hit some of its peers harder.
Rotork could find more costs to squeeze. The current plan is to slim down to 21 manufacturing plants by the year end, following three site closures, but analysts at Numis, another broker, point out that more than 70pc of output comes from just nine locations around the world.
The dividend is well covered, suggesting room for rises. With the cash pile growing to about £80m by the year end – worth 8p a share – there is also scope for acquisitions. The message is that there is no rush and they will probably be slightly larger than in Rotork’s recent past, where it got lost in a fog of complexity.
All in all, it is a decent time to get the house in order and there is potential here for the stock to outperform.
Investors can hear more at a trading update due on Nov 21.
Rotork shares have come off over the past month and now trade on 22.5 times this year’s forecast earnings. At this level, they are worth tucking away.
Questor says: buy
Ticker: ROR
Share price at close: 297.9p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.