Ricardo Share Blog – Final Results Year Ended 2019

Ricardo has now released their final results for the year ended 2019.

Revenues increased when compared to last year as a £16.3M decline in technical consulting revenue was more than offset by a £22.2M growth in performance products revenue.  Cost of inventories increased by £20.5M but other cost of sales was down £6.8M to give a gross profit £7.8M lower.  Depreciation was down £800K, redundancy costs fell by £1.6M but there no profit on asset disposals, which was £1.6M last time and R&D expenditure was up a net £1.7M.  Other underling admin costs declined by £7.5M, however.  Reorganisation costs declined by £1.4M but there was a £1.3M pension equalisation so the operating profit was down by £100K.  Interest payments were up £900K but tax charges declined by £2.7M to give a profit for the year of £19.8M, a growth of £2.2M year on year.

When compared to the end point of last year, total assets increased by £37.4M, driven by an £18.7M increase in goodwill, a £6.33M growth in customer relationships, an £8M increase in amount receivable on contracts, a £4.3M growth in software, a £3.2M increase in cash, a £2.9M growth in assets held for sale and a £1.9M increase in prepayments, partially offset by a £2.2M decline in deferred tax assets and a £1.9M fall in trade receivables.  Total liabilities also increased during the year as a £2.8M decline in current tax liabilities and a £5.4M decrease in the bank overdraft was more than offset by a £29.2M growth in the bank loan, a £6.3M increase in trade payables, a £4M growth in accruals, a £3.9M increase in pension obligations and a £3.4M growth in deferred tax liabilities.  The end result was a net tangible asset level of £46.7M, a decline of £26.9M year on year.

Before movements in working capital, cash profits declined by £3.2M.  There was a cash outflow from working capital and after tax payments declined by £2.8M the net cash from operations was £25.2M, a decline of £9.3M year on year.  The group spent £7.6M on property, plant and equipment along with £9.1M on intangible assets and £18.9M on an acquisition which gave a cash outflow of £9.7M before financing.  They then took out £29.2M of new borrowings to pay £11M of dividends which gave a cash flow of £8.6M and a cash level of £32.4M at the year-end.

Overall the group’s order intake reduced by 7%.  In Technical Consulting this reflects a combination of large multi-year programmes won in the prior year and lower orders in both automotive and rail this year.  In Performance Products order intake increased through a combination of growth in McLaren engine volumes and orders for the anti-lock brake and electronic stability control systems programme for the US Army. 

The pre-tax profit in the Technical Consulting division was £20.3M, a decline of £200K year on year.  The Energy and Environment business performed strongly with increased order intake and profit.  It has won increased levels of work internationally, particularly Australia, with prospects in the region looking even better following the acquisition.  It was a mixed year for the rail business.  It was impacted by lower volumes in Europe and Asia resulting in a small decline in organic profit but the acquisition in May made an immediate impact, offsetting organic decline.

The European automotive business suffered from significantly lower order intake and revenue as a result of the uncertain market conditions.  The impact on profitability was marked, but they took restructuring actions which mitigated the effect.  The US automotive business ended the year with an increased loss as results did not improve in the second half.  It will continue to focus on new energy vehicle opportunities and realigning its cost base in order to reduce losses and reposition itself. 

There was a good performance in automotive in China, which has led to further revenue and profit growth in the year.  The order book and pipeline remain strong, although they did see some evidence of a slowdown in orders towards the end of the year.  The defence consulting business performed well with its increased order intake driven by the US market.  The strategic consulting business delivered growth in line with expectations. 

The pre-tax profit in the Performance Products division was £11.9M, a growth of £2.6M when compared to last year.  Order intake significantly increased by 40%.  This performance was driven by increased volumes of engines for McLaren and the ABS brake kits programme for the US Army, with deliveries ramping up during the year in line with expectations.  Growth in these programmes has been complemented by the award of the MOD Combat Vehicle Reconnaissance programme and the Bugatti and Porsche transmission programmes as well as growth in new software license sales.

The have made good progress in the preparations for the supply contract for the Aston Martin Red Bull Valkyrie hypercar transmission which is due to enter production in early 2020.  They developed upgrades for the M-Sport World Rally Championship programme and won contracts to support key manufacturers within the Formula E Championship. 

In May 2019 the group acquired Transport Engineering for £21.7M in cash and £5.1M of contingent consideration.  The acquisition generated goodwill of £17.9M and came with a heft intangible customer contract asset of £9.7M.  The business is a rail technical services consultancy based in Australia.  During the one month the business was part of the group in the period it contributed operating profits of £300K.  Had it been part of the group for the whole year it would have contributed operating profit of £3.2M. 

Reorganisation costs of £3.4M comprised expenditure incurred as part of a restructuring of the Technical Consulting business, primarily in automotive.  These costs comprised redundancy-related and dual running costs in relation to headcount reductions and the establishment of a shared service centre.  In addition, contractor costs, professional fees, onerous contract costs and other costs associated with asset disposals in the prior year and scaling down of operations in Germany are also included. 

After the period-end the group acquired PLC Consulting for £3.9M.  The business is an Australian firm with a technical advisory capability across the project lifecycle in infrastructure, environment and planning, including supporting the environmental requirements of master-planning, business cases, procurement, design, construction and operation.  There is also a contingent consideration payable of £5.4M and the acquisition generated goodwill of £2M. 

In August they purchased the freehold property of their Detroit Technical Centre for £14.2M.  This removes the long term lease commitment and the DTC assets will be marketed for sale, including this freehold property.

Going forward, current political and economic uncertainties aside, the group are well positioned for growth with a strong order book and pipeline, recurring revenue from long-term production programmes and the benefit of recent acquisitions. 

At the current share price the shares are trading on a PE ratio of 21 which falls to 13.1 on next year’s consensus forecast.  After a 4% increase in the dividend the shares are yielding 2.7% which increases to 2.9% on next year’s forecast.  At the year-end the group had a net debt positon of £47.4M compared to £26.1M at the start of the year. 

Overall then this has been a rather difficult period for the group.  Profits were up, but this was due to lower tax charges and underlying profits were sluggish.  Net tangible assets declined and the operating cash flow deteriorated with no free cash after the acquisition.  The performance products division is doing well, with increased orders from McLaren and the MOD but the Technical Consulting division is really struggling with rail and automotive in particular showing weakness.  There is no real sign of a pick up in automotive, but rail should improve after the acquisition.  With a forward PE of 13.1 and yield of 2.9% these shares are probably priced about right as they are quite dependent on automotive.

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