Ricardo PLC
Shoreham Technical Centre, Shoreham, W. Sussex, BN43 5FG
Ricardo is primarily a technical consultant. They provide consultancy in a large number of industries ranging from automotive to sustainable energy. They also manufacture technical items such as car engines, transmission systems and other vehicles systems. Some of the sectors Ricardo provide technical consultancy are as follows:
Marine – Ricardo offer advice and consultation on marine engines. A particular driver is the need for marine transport to conform to certain emission regulations.
Clean Energy & Power Generation – Most of the technical consulting areas are vehicles but Ricardo also provides solutions for power generation, in particular in the Wind turbine sector. The company provides drivetrain and other technologies to help improve cost, efficiency, durability and emissions from wind turbines.
Rail – Ricardo provide solutions to improve the efficiency of railway rolling stock.
Defence – Ricardo develops and provides vehicles for army use. The UK MOD has ordered some of the “Ocelot” vehicles, and these are also being looked at by the Australian army. The group also develops engines for unmanned droids favoured by the US.
Agricultural & Industrial Vehicles – Ricardo consults on improving the fuel efficiency of these vehicles. The emissions legislation in this area is following that of the passenger car as governments continue to look for areas to reduce emissions, which is giving Ricardo more work in this area.
Motorcycles – Ricardo have worked with BMW on an engine for various motorcycles.
High Performance Vehicles & Motorsport – Ricardo provides consultancy, design, development and production for motorsport teams and manufacturers. Recently they have worked with McLaren on their engine for the new supercar and they work with the FIA, providing advice on how powertrain technologies relate to the 2013 regulations
Passenger Cars – This is the most important area for Ricardo. They are involved in the development of fuel efficient engines and working with OEMs to make sure their cars are fully compliant with increasingly stringent emissions targets. They are also involved in developing energy storage devices for cars and are currently working on a range extender powertrain. Two main clients are Jaguar Landrover and The Great Wall Motor Company from China.
Government – Accounting for 1% of work, Ricardo consults on the electrification of transport and the knock on effects this has on the electricity grid. This area is expected to remain challenging due to US and European government budget constraints.
In addition, Ricardo provide strategic and management consultancy in many of the sectors covered above and a new energy practice has been set up. In addition to consulting services, the group also make high performance equipment such as drivetrains and supercar engines. They have worked on the transmission of the Peugeot 24 hour Le Mans cars and the McLaren and Renault F1 cars; and have also provided the transmission for the Bugatti Veryon, the fastest road car in the world, along with that of the new McLaren supercar.
They operate in the US, UK, Germany, Czech Rep, France, Italy, Russia, China, India, Japan, Korea and Malaysia.
First I will look at the income statement.
So we see that both overall income and the profit for the year are higher than last year. The total income is higher because the swing to a gain for the acturial valuation of the pension scheme (a £26.3M swing to the good). The profit for the year benefited from the sale of the German exhaust business, which was the discontinued operation that drained £2.7M last year.
The profit before tax of £15.4 was £4.6M higher than in 2010 and looking closer we see that both revenue and costs have increased. Revenue is up across the board but the £12M increase to £40.9 for performance products is particularly satisfying. Staff costs increased by more than £7.5M which suggests the company is hiring more workers for the increased business so all in all, this is quite a good set of results.
EPS and P/E Ratio
I am now going to have a look at the EPS and the corresponding P/E Ratio.
| EPS |
2011 |
2010 |
|
| PROFIT AFTER TAX |
15,200,000 |
7,600,000 |
7,600,000 |
| NUMBER OF SHARES |
51,800,000 |
300,000 |
51,500,000 |
| EPS |
29.3 |
14.8 |
|
| SP |
404.5 |
130 |
274.5 |
| P/E |
13.8 |
-5 |
18.6 |
Taking today’s share price, the P/E is a historically cheap 12.3 but various analysts expect the EPS next year to be about 27.3, leaving the forward P/E at 13.2 which is a similar value to that recorded at year end 2011 so although the shares are a little cheap they do not seem to be a huge bargain on this valuation.
Now to look at the Balance Sheet
We see here that net assets are up £24.8 to a respectable £89.6 but when looking further we see this is almost entirely driven in a reduction in pension obligation liabilities of £21M to £13.4M so Ricardo has obviously been working hard to reduce the deficit to a more manageable level. Still looking at liabilities we see that the group is doing a good job of paying off its bank loans, which are down£9.4M to leave bank borrowing at £2.7M (although the bank overdraft is up slightly). The only other significant movement in liabilities is the £7.6M increase of payments in advance to £20M. This is not too concerning as far as liabilities go as it is not really an indication that the group needs to pay out a certain amount unless the work is not done.
The assets remain fairly stable throughout the year with the biggest movement seen in the £12.1M increase in trade receivables to leave that at £38.5M. This could either be due to increased work (good) or Ricardo’s customers are taking longer to pay (bad). I suspect it is a mixture of both. There is a disappointing dip of nearly £6M in the amounts receivable on contracts, perhaps a major contract is winding down. The only other items of note, I think, is the pleasing increase in cash to just under £10M and the £2.5M fall in inventories.
Shareholder Makeup – A quick look at the shareholders who own more than 3% of the company reveals that they are all investment and asset management companies, with the larges being Delta Lloyd Asset management at just under 14%.
Cash flow:
I think the cash flow here is a good example of the importance of delving deeper into the figures, and combining the cash flow figures with other financial data. The overall cash flow is negative, albeit only slightly but within this we see that the group has paid back a net £9.8M in bank loans. Looking back over the balance sheet we see that bank loans and overdraft liabilities are £8.2M so if we get a similar cash flow next year, Ricardo will be debt free and accumulating cash to be spent on shareholders or (hopefully) useful acquisitions. So, I think the cash flow here is probably better than it initially appears.
We can see that cash from operations is up due to some of the reasons touched on in the income statement analysis. We also see less money tied up in inventories and that there is also an increase in payables, suggesting Ricardo may be holding onto their money to aid cash flow (I will keep an eye on this in future statements). The cash flow is negatively impacted by a slightly larger spend on capex and an unfavourable shift in the exchange rates.
Overall then I believe these are a fairly good set of results. We see that profit for the year is up 7.6M to 15.2M, primarily due to increased revenues and net tangible assets are up £21.6M to 67.3M due to a favourable shift in the valuation but the cash flow is slightly negative at -£300K. We see, however, that the shift in net debt is a positive one to the score of £9.3M, leaving the group with net cash and a very favourable gearing level of -3%. The current P/E is fairly cheap at 12.3 but analysts are expecting a lower EPS next year and the forward P/E is a more average 13.2. The dividend is fairly decent, although not stellar at 3.2% but the cover, at 2.7 is very respectable.
It is fair to say that Ricardo are in a very good position to benefit from the increased regulation regarding emissions as they seem to have carved themselves somewhat of a niche for coming up with fuel efficient engines and other mechanical solutions and we see regulation not just for passenger cars in the US and Western Europe but now rail and marine industries are being affected. It can also be seen that the BRIC countries are increasingly looking to reduce carbon emissions, thereby offering more opportunities for Ricardo. In a similar vain, Ricardo are also developing their wind turbine technologies to capitalise on this trend in the energy sector.
The board have stated that the UK and German technical consulting divisions have experienced increased orders, but this is somewhat slower in the US. However many of the large auto makers are continuing to outsource R&D to companies like Ricardo. As well as the traditional business of the passenger motorcar, there seems to be an increasing opportunity for the group in the defence sector. The UK MOD have ordered over 200 Ocelot vehicles and the Australian army is also looking into this. In the US, Ricardo have developed the engine for those flying motorised droids that the States use to harass the Taliban. In fact, Ricardo seem to be diversifying well with the strategic management consulting recovering somewhat with a new office opened in India to support the Asian market and the group has expressed a desire to cross sell this consulting to some of their technical consulting clients.
There are two clients that represent 17% and 14% of their revenue so the loss of either of these would have a detrimental effect on results and due to the contractual nature of this business, the group could find themselves involved in work that costs more than initially expected. There is also a fairly large pension deficit here but having said that, the deficit is reducing and Ricardo have stated their intention to eliminate the deficit sooner rather than later. Currency changes have little effect on the group but a 10% weakening of the Euro would have a £100K detrimental effect on results.
In conclusion then, I like Ricardo. I like their product offering, I like their reducing debt and net cash and I like their focus on solutions for emissions regulations. On the other hand, their dividend yield isn’t massive (but it is well covered), the shares are higher than they were when I originally purchased (always a difficult psychological barrier for me) and although good value the P/E ratio is not exactly cheap. So, considering this I may try and break my fear of “averaging up” and will look for a good entry point to try and buy some more.
On the 17th November 2011, Ricardo issued a management statement for the 4 months to the end of October. They stated that Revenue was 8% up on the same period last year, and the order book is also higher. The Technical consulting business has seen strong orders from Asia, the UK and Germany but weaker performance in the US business. The strategic consulting business is not making progress, despite some investment due to clients reducing spending due to the poor economic conditions. The performance products business is seeing volumes of the Supercar engines ramping up and the start of the production of Ocelot vehicles.
The struggling strategic consulting business is disappointing but overall I can see enough in this statement to reinforce my earlier sentiment.
On 10th Jan 2012, the group released a trading update which basically reiterated what was said in the management statement.