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Specialist UK engineers find sweet spot as pandemic boosts valuations

The Cotswolds hot spring town is home to Spirax Sarco. British engineers manufacture special pumps and tubes essential for the production of the Covid-19 vaccine, a steam system for cooking Heinz baked beans, and an electric thermal heater for the safe launch of NASA’s Space Shuttle. ..

But even though its profile is worth nearly £ 11 billion, it rarely exceeds its customers.

“We’re the FTSE 100, but it’s not a common name because we operate in a very specific niche,” said CEO Nick Anderson.

Spirax Sarco is one of the few sophisticated British engineers focused on the hidden corners of modern industry, whose reputation soared before and during the pandemic. Many outperform more common and cyclical manufacturers listed in London, such as IMI, Weir Group and Smiths Group, and have been downgraded by the medical sector struggling to separate and sell since 2018. Has been done.

Spirax Sarco’s share has risen 74% from pre-pandemic levels, even after more than tripled in the last five years.

Other companies in the industry, Halma, Spectris and Renishaw, follow a similar pattern, a trend that extends beyond the UK. Professional industry groups such as Swiss actuator maker Berimo, Japanese sensor maker Keyence, and Ohio-based experimental equipment maker Metratredo far outperform their broader conglomerate rivals. I will.

Spirax Sarco factory in Cheltenham. The company is one of the few sophisticated British engineers focused on the hidden corners of modern industry © Andrew Fox / FT

Bankers are now working with these professionals and more commercialized companies that are struggling to consistently increase profits, partly due to marginal pressures from intensifying competition in low-cost areas such as China. It points to an unprecedented gap between the two.

“Previously 10% or 20% premiums are over 50% between high quality people and the average person in industrial technology. We are talking about two very different worlds.” The industrial banker said.

One factor behind the attractiveness of the niche UK group to investors is that its highly specialized products are used in some of the most vibrant pandemic markets, such as pharmaceuticals, food and beverages. It is being used. Customers are less vulnerable to cost-cutting initiatives because they believe their products are essential.

During the pandemic “service recession,” investors sought a resilient tech engineer, Belenberg analyst Anthony Prom said. “They have been treated almost like cash for the past 12 months because they don’t disappoint you,” he said.

Julian Fosh, fund manager of Liontrust Asset Management, a large investor in a UK specialist manufacturer, said the two companies are good at reinvesting profits and ensuring high cash returns on investment capital.

“We buy and hold. It’s better to have a quality business and pay a better price,” Fosh said.

Other manufacturers are exposed to pandemics. For example, the operating profit of bodycote, a heat treatment supplier, was almost wiped out last year due to its high exposure to the automotive and aerospace sectors. Mount Vesuvius, a molten metal flow engineer, was hit by a slump in steel production.

Line chart of price-earnings ratio, forward blend 12 months (x) showing premium expansion for high quality manufacturers

However, there is growing concern that successful professional companies are beginning to be overvalued.

Equipment maker Renishaw couldn’t find a buyer in a recent search. Its value has risen from £ 3 billion before the pandemic to £ 5 billion.

At Spirax Sarco, Halma, Spectris, Renishaw and Rotork, the average ratio of corporate value to interest, taxes, depreciation and projected revenue before amortization reached approximately 34x. According to Bloomberg data, the baskets of the other 11 engineers listed on London have been traded 20 times.

Investors and analysts dismiss the concept of the bubble and defend it as justifying the premium of specialist engineers, given the expected profit gains following the recovery in industrial production this year.

Andrew Williams, CEO of Amersham-based Halma, which manages 45 health and safety businesses, said the group operates in a “market with long-term structural growth drivers.” ..

The £ 10.4 billion group has doubled its earnings in five years and increased its dividend by more than 5% in 42 years by acquiring and expanding its often privately held SMEs.

Spirax Sarco factory in Cheltenham

Investors and analysts dismiss the concept of bubbles and defend the premium of justified specialist engineers © Andrew Fox / FT

“We have a 20-year mindset when it comes to acquisitions .. The value we bring is to mature the business into a global company,” says Williams.

While some manufacturers such as Spectris are challenging software, Investec analyst Scott Cagehin said groups such as Spirax Sarco and Halma help customers reduce water and energy usage. He also said that it has become attractive to investors as an “ESG play”. Exposure to oil and gas, such as actuator specialist Rotork, has put pressure on others.

However, Beijing has indicated that it intends to develop 10,000 last week, and the market is expected to become even tougher. “Little Giants” Niche manufacturing is under increasing pressure on a group of UK professionals who earn most of their revenue abroad.

Specialist UK engineers find sweet spot as pandemic boosts valuations Source link Specialist UK engineers find sweet spot as pandemic boosts valuations

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