Ricardo has now released their final results for the year ending 2014.
Revenues were up across both business sectors but Technical Consulting seemed to struggle for an increase, up just £700K as the division was constrained by the late phasing of new orders while Performance Products fared much better, increasing sales by £5.8M. Sales fell in the UK and Japan but increased in the other markets. Staff costs and cost of inventories both increased, however, to give a gross profit some £1.8M lower than last year. Admin expenses were down, however, as the group spent less on R&D and there was a reversal of last year’s trade receivable impairments. Finance costs were broadly similar to last year and a slightly larger tax expense couldn’t prevent the profit for the year from being some £2.4M higher than in 2013 at £19.2M.
When compared to the end point of last year, total assets increased by £15.4M driven predominantly by a £5.8M increase in cash levels, a £5.6M growth in receivables on contracts and a £5.6M hike in trade receivables. Liabilities also increased during the year predominantly due to a £10.8M increase in trade payables, only partially offset by a £3.6M reduction in deferred income. The outcome was a net tangible asset level of £65.8M, an increase of £7.4M on 2013.
Before movements in working capital, cash profits were £35.2M, £3.7M better than in 2013. A large swing to an increase in trade receivables and a £1M increase in the amount spent on tax meant that net cash from operations was some £7.7M lower than last year at £21.6M. Of this cash flow, £6.3M was spent on tangible assets and another £4.2M on computer software which left £7.5M to spend on dividends and a surplus of £6.5M to double cash levels to £12.6M and as the group is debt free, this represents their net funds. It is clear that dividends are comfortably covered by cash flow and levels are building up again which could indicate a hike in dividends or another acquisition in the future which is a good situation to be in.
Underlying operating profits at the Technical Consulting business were £17.8M, a fall of £700K when compared to last year as a large programme was ramped down and not fully replaced by new contracts, although order intake has improved in Q4 from the US in particular. The UK business has worked on a range of multi-year programmes and has secured good new business in various sectors and a focus on cost management has helped the UK remain the main driver of profits. In Germany a new Managing Director was appointed and a number of new contracts were won in the motorcycle, large engine and marine sectors in particular. In the US business has built momentum in the second half with strong growth in the passenger car and commercial vehicle sectors and in Asia the Chinese business has started to deliver a number of large locally won contracts including a mixture of hybrid vehicle, engine and transmission activities. Ricardo-AEA had a good year and has seen growth in both international and private sector clients.
Activities in the government and environmental sector have been driven by long standing agreements between Ricardo-AEA and various government bodies. Despite UK government pressure on budgets, the group has secured a number of major contract wins including large projects with DEFRA and DECC. In Europe the group are working with the EU Commission on a range of future potential green vehicle initiatives. The business has also expanded its customer base internationally, for example the contract win in Saudi Arabia focused on air quality improvement in Riyadh.
Passenger car projects continue to be driven by global emissions legislation and during the year demand remained strong with large multi-year contracts from OEMs in the US, Japan, China and the UK. Significant contract wins have included a range of diesel and gasoline design and development programmes ranging from three cylinder to V8 configurations. The group also won hybrid installation and development programmes for China based vehicle manufacturers.
In the Performance Vehicles and Motorsport arena, long term contracts tend to also result in orders for the Performance Products business. The group has seen continued demand for products for competitive motorsport and performance versions of existing vehicles. In the motorsport arena, projects were largely focussed on the design and development of products for subsequent manufacture as part of the Performance Products business, predominantly transmission and driveline products, ranging from individual components, electronics modules and control units to entire systems.
In Motorcycles the group has seen strong growth this year driven by the need for a reduction in CO2 emissions together with an increasing demand for high performance motorcycles in developing markets. Ricardo has entered into a partnership with Exnovo in Italy and have seen a growing interest in e-bikes. During the year significant multi-year contracts have been won in Japan, China and Germany.
Activity in the commercial vehicles sector has picked up due to legislation and new product development for global application with strong engagement in the US and Japan in particular. There has also been a growing interest in the after treatment and fuel cell capabilities that the group acquired with the purchase of a new technical facility in California. The group sees the areas of fuel economy improvement, system optimisation and hybridisation as having growth potential. Contract wins have included control and electronics hardware design and development as well as engine design, development and testing across light and heavy duty configurations.
Activity in the off-highway sector continues to be driven by emissions legislation. During the year stage IV emissions standards were introduced into Europe which reduced activity as manufacturers had already got their vehicles compliant. The focus in the coming years will be on assisting clients with EU, US and Chinese legislation for 2020. The highly successful TaxiBot programme for IAI in Israel continued during the year with the ongoing delivery of the wide-body version of this advance pilot controlled taxiing system. In addition the group has also launched its TorqStor flywheel energy recovery system.
In the Defence sector the group has made a number of new contract wins in addition to the continuation of some long-term contracts. There has been increasing activity in Europe, the Middle East and Asia and this includes the development of future 4×4, 6×6 and 8×8 vehicles. In the UK there has been increasing demand for the Total Systems Optimisation approach focussing on optimising vehicle architecture to minimise costs and maximise fuel efficiency. In the US the group has continued with the delivery of the FANG vehicles for DARPA.
The rail sector continued to perform strongly and like the performance vehicle sector, activities led to long term manufacturing contracts for the Performance Products business. The group has continued to develop a broad geographic spread with a variety of programmes taking in Tier 1 equipment manufacturers, rail operators, rail equipment manufacturers and governments. Projects have included monorail driveline design and research into energy storage systems and the use of alternative fuels such as natural gas.
The Clean Energy and Power Generation sector has seen the majority of its activity in the large engine area for power generation with less activity in the renewable energy sector and there has been increasing levels of activity in fracking applications for the oil and gas sector. Going forward, management are targeting growth in the Transport and Security, Energy, Scarce Resources and Waste sectors.
Underlying profits in the Performance Products business were £7.9M, an increase of £1.8M when compared to 2013 and order intake increased by £21M to £67M. This year saw the launch of a new product called IGNITE which is the first Ricardo software product targeted outside of internal combustion engine applications. It is a systems engineering tool for ground vehicle performance and fuel economy simulation, which is a growing area of opportunity for the group. In the defence sector the delivery of Foxhound vehicles has been concluded with the delivery of some 376 vehicles. In high performance vehicles, the demand for engines from McLaren for its supercars continued and Ricardo now supply power units for the new 650S and the P1 hybrid models and the group also continued to supply dual clutch transmissions to Bugatti. In motorsport, the group has had manufacturing orders from Formula 1 customers and transmissions for the Japanese Super GT, GT3 and the Renault World Series Championships. In addition, the group has also been producing Porsche Cup transmissions throughout the year.
Rail activity performed strongly through the continuing supply of monorail transmissions for clients in Brazil and Malaysia. Going forward the new multi-year engine supply agreement with McLaren will generate about £40M per annum in revenues from 2016/2017 onwards. The group also signed a multi-year production supply contract with another customer starting in 2015/2016 with total contract revenues expected to be more than £35M.
Ricardo has placed contracts for a £4.5M capital spend which has not been provided for on the financial statements. During the year demand from US, Chinese and Japanese customers grew strongly but activity levels from UK based customers reduced and Germany remained challenging with losses incurred at a similar level to last year
Ricardo has developed a number of interesting products and services over the past year. One is TorqStor, a self-contained flywheel energy storage system in order to create more efficient off-highway vehicles. The product seems to enable a fuel saving of about 10% and does not require any significant increase in machine complexity or maintenance requirements and the group is currently in discussions with a number of OEM and Tier 1 partners. Another project is work on a new generation of military vehicles. In partnership with Morgan Advanced Materials and Ultra Electronics, the Cougar post-design service programme which covers the Mastiff, Ridgeback and Wolfhound vehicles could last for as long as seven years. The programme will see the consortium deliver an annual service contract under which they will provide a team of experts to offer technical and project management services to support the fleet of more than 600 vehicles.
One of the main drivers of growth for the group is increasingly stringent emissions legislation. In the US, Nitrogen Oxide limits have been recently reduced to one fifth of the previous level for off-highway vehicles. Ricardo have been working with South Korea’s Doosan Infracore to develop their existing engine for compliance with the new regulations which involved the removal of the DPF unit to be replaced with Ricardo’s own Ultra-low spot Twin Vortex Combustion System (TVCS). Which resulted in a dramatic reduction in particulate matter and a high efficiency SCR system was added to target the NOx. The end result was the achievement of the emissions targets within a good margin and improvements in fuel consumption. A number of other companies are also using Ricardo’s TVCS technology including JCB, Lombardini and many more confidential clients.
Ricardo also undertakes environmental consultancy work. During the year they were appointed by the ArRiyadh Development Authority in Saudi Arabia to deliver a waste management strategy in order to minimise the amount of waste heading to landfill. The group have also worked with Johnson Matthey on the development of its carbon management programme. With recycling targets in Europe beginning to come in to force and commercial companies increasingly focused on the need to secure the resources they require, resource efficiency and waste management services are very much in demand.
The order book is at a very healthy level with £142M of business compared to £121M at the end point of last year. Some 35% of these orders are for passenger car projects and 25% are for motorsport projects with 50% of the total orders in the Engines sector. As mentioned previously, the group has received a multi-year engine supply arrangement with McLaren which will deliver revenue for many years from 2016 and in May the group signed an additional multi-year production supply contract with another customer. Despite diversifying somewhat since last year, one client still accounts for over 10% of group revenue.
At the end of the AGM, Michael Harper, the current chairman is retiring after spending 5 years in the role and 11 years as a non-executive director. After joining the board in January, it is intended that Michael will be succeeded by Terry Morgan. Terry is currently the Chairman of Crossrail, the Manufacturing Technology Centre and the National Skills Academy for Railway Engineering
The group is currently in an enviable position of having net funds of £12.6M compared to £6.1M at the end of last year. At the current share price a 9% increase in the dividend yields 2.4% increasing to 2.6% on next year’s estimates, which is decent if not that exciting. At the current share price the P/E ratio is 17.4 falling to 15.5 on next year’s forecasts, which seems fairly good value considering the quality of the company.
Overall then, profits are up, net assets have increased due to a hike in receivables and cash levels and the cash flow is positive, and although lower than last year due to adverse working capital movements, the cash is more than enough to cover capital expenditure and dividend payments, giving a decent surplus on top. Operationally, performance products seems to be doing particularly well with the McLaren deal giving some good visibility to earnings and the generally increased order book bodes well for the future too. Currently Ricardo is a well-run company with very good prospects going forward. It represents one of my largest holdings (behind only Photo-Me and GVC) but I am sorely tempted to add here.
On the 29th October the group released an interim management statement covering Q1 of this year. There has been a good start to the year with order intake up by 8.5% representing a good mix of business with a particularly strong start in Asia. The order book at the end of September was £142M, the same record level seen at the end of last year. Significant orders in Technical Consulting include a large commercial vehicle project for a new Asian customer, and further power generation and passenger car work in the UK. Ricardo-AEA is continuing to develop overseas and has been very busy bidding on a range of new international opportunities. Additionally the group have completed a small bolt on acquisition in the shape of Vepro Ltd, an expert in motorcycle chassis, powertrain integration and prototype build that will contribute about £1.5M of revenue per year. There was no indication of what Ricardo paid for this business but overall this is a positive update following positive comments at the year-end last year.
On the 3rd November the group announced that the new Chairman, Terry Morgan had bought his first 10,000 shares in the company.