Ricardo has now released their interim results for the year ending 2019.
Revenues increased when compared to the first half of last year as a £3.7M decline in technical consulting revenue was more than offset by a £10.4M growth in performance products revenue. Cost of sales increased by £10.9M to give a gross profit £4.2M lower. Admin expenses declined by £4.5M, however but the £1.2M charge relating to the guaranteed minimum pensions equalisation gave an operating profit £800K lower. Finance costs were up £200K but tac charges were down £1M due to no one-off changes in the US tax rate this time round which meant that the profit for the period was £7.8M, a decline of £100K year on year.
When compared to the end point of last year, total assets increased by £11.7M driven by a £9.5M growth in receivables and a £5.1M increase in cash, partially offset by a £1.2M decline in inventories, a £1.2M decrease in deferred tax assets and a £1.1M fall in other intangible assets. Total liabilities also increased during the period as a £2.8M fall in the bank overdraft and a £2.2M decline in current tax liabilities were more than offset by a £9.6M growth in payables, a £9.3M increase in bank loans and a £3M growth in pension obligations. The end result was a net tangible asset level of £69.1M, a decline of £4.5M over the past six months.
Before movements in working capital, cash profits declined by £3.8M to £18.1M. There was a cash outflow from working capital and despite a £1.2M reduction in the pension payments and a £2.1M fall in tax payments, the net cash from operations was £12.2M, a decline of £12.1M year on year. The group spent £1.7M on acquisitions, £3.2M on intangible assets but the £3M spent on fixed assets was offset by a £3M received from asset sales to give a free cash flow of £7.3M. Of this, £1M was spent on shares for pay awards and £7.9M was paid out in dividends. After they took out £9.2M of new borrowings, the cash flow was £7.8M and the cash level at the period-end was £31.6M.
The underlying operating profit in the Technical consulting business was £11.7M, a decline of £600K year on year despite Control Point contributing an extra £200K, with the automotive businesses in the US and Europe continuing to be impacted by a challenging macro environment and volatile market conditions which have led to significantly reduced investment across the sector. This has been mitigated by a good performance in rail, energy and environment and defence.
The European automotive business experienced lower order intake and profitability due to continuing uncertainty in the sector. Actions taken to restructure the cost base, including downsizing of the operations in Germany and headcount reductions in the UK have helped to limit the impact. Further headcount reductions will take place in the second half of the year. The automotive market in the US continues to be challenging and the US automotive business ended the half with a loss similar to last time. The business did increase its order intake as it focused on new energy vehicles, however.
The automotive business in China performed well with good levels of order intake and profitability. The rail business performed ahead of last year and in line with expectations. Order intake declined due to a large, multi-year order secured last year which was not repeated. The energy and environment business has seen improved profitability due to increased utilisation, with order intake in line with the prior period. The strategic consulting and defence engineering business continued to perform well.
Within the off-highway and commercial vehicles sector the group saw continued demand for their capabilities in the agricultural vehicles sector across Europe and Asia. The order book and pipeline include a broad mix of opportunities in electrification, alternative fuels, emissions improvement and transmission automation. In the US, strict regulation of greenhouse gas emissions are driving interest in powertrain efficiency.
The rail business has seen good levels of activity across its assurance and technical consultancy offerings. They helped bring Amsterdam’s new metro line into operation, the culmination of more than eight years of involvement. In Denmark they worked on the extension of the Aarhus light rail system, having acted as the project’s independent safety assessor. In Taiwan they have started work on Taipei’s new 27Km Green Line, one of the largest assignments the business has taken on.
The underlying operating profit in the Performance Products was £4.9M, a growth of £1M when compared to the first half of last year driven by increased engine and transmission volumes. McLaren engine volumes have continued to increase significantly, supplemented by higher Porsche and Bugatti transmission volumes, although motorsport sales reduced due to the timing of programme cycles. Deliveries of ABS kits are now underway and as a result the defence business has seen a much improved level of profitability. They continue to see good growth in order intake and operating profit in their software business, driven by perpetual licence sales in China.
After the period-end the group signed the third supply agreement with McLaren which confirms their supply of engines to 2025 and beyond. In the UK defence market they have secured a programme for the refurb of the final driveline system for a core UK defence tracked vehicle platform.
In the software business they are supplying modelling software for Sothern Water to model the water network in Brighton. This has the potential to be used for asset allocation decisions and network investment planning against changes in demographics, climate change and population growth. They are also looking at how they can supply this software to solve the challenges of where to place electric vehicle charging infrastructure.
Order intake was £202M, a reduction of 15% reflecting the impact of large, multi-year programmes received in the prior period together with lower orders in European automotive in the current period. This was partially offset by strong order intake in performance products due to increased McLaren engine volumes and the ramp-up of orders on the ABS kit programme for the US Army. The closing order book was up 2%.
There were a number of one-off items. Acquisition related expenditure of £500K is mainly related to the acquisition of Control Point, reorganisation costs of £1.3M relate to the restructuring costs of the group’s automotive businesses across Europe and the US and comprise redundancy costs and dual running costs arising from the establishment of a shared services centre in the Czech Rep together with contactor and other costs associated with asset disposals in the period year. There was a £1.2M charge relating to the equalisation of pension schemes and £2M of amortisation of acquired intangibles.
Going forward, acknowledging the uncertain economic climate, the board remain positive due to a good order book and diverse pipeline, the recently signed long-term McLaren programme, and deliveries of ABS kits now underway.
At the current share price the shares are trading on a PE ratio of 19, although the underlying ratio is 12.5, falling to 11.6 on the full year forecast. After the interim dividend was increased by 4% the shares are yielding 3.1% which remains the same for the full year. At the period-end the group had a net debt position of £27.5M compared to £26.2M at the end of the year.
Overall then this has been a rather mixed year for the group. Profits were broadly flat, net assets declined and the operating cash flow deteriorated. Some free cash was generated but it didn’t cover the dividends. The issues have been in the technical consulting division with the subdued automotive market in the US and Europe to blame. The Performance Products division has performed well with higher volumes of McLaren engines and transmissions for Bugatti and Porsche.
The supply contract with McLaren really helps with visibility going forward but there is little sign of the automotive market picking up. The issue is that at the moment there is no free cash to pay down the debt but the shares are looking decent value with a forward PE of 11.6 and yield of 3.1%. Tricky one this, should there be no further deterioration in the automotive market these shares could be worth a look, although I would ideally like to see some evidence of the debt being paid down first.