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magazineBuy Ricardo as it moves beyond auto
To be an expert engineering consultant to the automotive industry may sound like a poisoned chalice, and a poor investment proposition, but there is more to Ricardo’s (RCDO) story than meets the eye.
The West Sussex-based business has a 100-year track record in the industry but today it does so much more than just cars, buses and tanks.
Ricardo provides engineering, technical, environmental and strategic consultancy services for transportation original equipment manufacturers and operators, energy companies, financial institutions, and government agencies all over the world. It operates out of more than 50 offices and technical centres around the globe.
This includes providing wind farm life-cycle planning alongside greenhouse gas emissions mitigation, rail infrastructure monitoring and maintenance as well as designing and building high-performance engineered systems for motorsport and defence.
Non-automotive operations have been expanded significantly over recent years, through acquisitions and organically, to the point where auto now represents just 30% of revenue, according to Liberum.
Yet the market has been slow to pick up on these developments. To address this information gap the company plans to be more transparent, breaking out orders, revenues and profits for six divisions; Automotive & Industrial, Defence, Energy & Environment, Rail, Performance Products and Strategic Consulting & Software.
SHIFTING MARKET PERCEPTIONS
This development should help shift market perception from Ricardo as auto consultancy towards the diversified business that it really is. For example, defence work has grown from £6m in sales in 2016/17 to £40m last year, while high-performance revenues have increased 17% to £103m.
Auto will remain a key market for Ricardo, where it is well-placed in the electric transition, experts also suggest that the industry’s decline may have bottomed out in late 2019.
The company has seen work evaporate from some of the most stretched manufacturers, Jaguar Land Rover, for example.
Even if there is no auto industry recovery to speak of it is the newer growth markets which promise to prop-up profits and spark real growth through 2020.
Building out its Rail, Energy & Environmental business in places like the US, where it has no presence thus far, is a major growth lever, while software-type businesses offer a particularly exciting prospect.
Net debt of approximately £60m by the end of this year gives plenty of borrowings headroom for expansion.
Liberum sees underlying pre-tax profit going from £37m last year to nearly £41.7m this year, and on to £44m in 2020/21.
That implies a price-to-earnings (PE) multiple of 12.4, a hefty discount to many peers.
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