Rotork (ROR)

Great British Business: Manufacturing and Engineering

Russia robs Rotork

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Russia robs Rotork
Rotork (ROR) has been one of the stockmarket's most reliable engineers for at least the past decade, possibly longer. It makes pneumatic and hydraulic valve actuators for the oil and gas industry, and control systems used in power stations. But it's had a disappointing third-quarter and sanctions against Russia over the Ukraine crisis are beginning to bite.

Order intake for the three months rose by 4.3%, or by 5.6% at organic constant currency (OCC), and is now up 3.2% and 6%, respectively, for the year. The order book now sits at £213 million, up 5.8% organically. But a 1% drop in quarterly revenue, or 0.5% OCC, means Rotork has a lot to do in the fourth quarter to meet City expectations for 5% organic growth during the second half.

True, the final months of the year are historically among Rotork's strongest, and management anticipates margins will be "similar" to 2013. That implies nearer 26.2% compared with Investec Securities forecasts for 25.6%. But the shortfall appears too wide to narrow with the year fading fast.

Fluid Systems is the main culprit, with order intake there down 12% organic. "This...reflects a strong comparable period in 2013 and the delay and, in some cases, the loss of orders caused by the tightening of trade sanctions on Russia," said Rotork. Those sanctions cost the company about £6 million. Strip out the benefit of acquisitions at the Instruments division, and orders fell 5.8%.

On a brighter note, the core Controls business has continued to grow throughout the year and increased organic new orders by almost 16% during the quarter. Europe is subdued, although demand from the oil and gas industry in the Americas and Asia Pacific remains strong. New orders at the Gears unit were up 23%.

Of course, the plunging oil price could have repercussions for Rotork longer term - the industry accounts for almost 60% of group revenue. However, exposure to refining and transportation, so-called downstream and midstream activities, should shield it from the worst of any fallout.

At 2,400p, Rotork shares trade on 18 times earnings forecasts for 2015. That's a premium rating, but one which the company has justified over the years with superior cash generation and earnings growth. Not too long ago that multiple was in the mid-20s. There may be further downside if difficult markets persist, but Rotork has tended to do well over the longer term.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.


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