Rotork plc - return to growth and margin expansion
Rotork is a market-leading global provider of mission-critical flow control and instrumentation solutions for Oil & Gas, Water and Wastewater, Power, Chemical process and Industrial applications. Its shares have a premium listing on the London Stock Exchange (symbol: ROR), have a market cap of c£3bn and are a constituent of the FTSE 250 index.
We were delighted to welcome Group Finance Director Jonathan Davis and Andrew Carter, Director of Investor Relations, to our first webinar of 2022 to give an introduction to the company and talk about performance in 2021 and the prospects going forward. A recording of the webinar is available here.
The presentation began with a short history of Rotork which began trading in 1957 in Bath. They moved to their current site, also in Bath, in 1961 and over the next 30 years the company grew both in the UK and internationally, into a number of markets. From the outset there was a focus on R&D and the company own their intellectual property. The model has always been one of assembly rather than manufacture which means a capital light business model. From 1990 the company grew quite aggressively through acquisitions, completing over 40 deals in the period. From 2020 the current structure of the company was established around a customer focussed model.
At its heart, Rotork is a specialised advanced engineering company which makes products critical to the operation of its customers facilities. This is generally in harsh environments (think the Saudi Peninsula and Artic) and so the products need to be able to withstand extreme temperatures (-61 to +61), wet surroundings and sometimes a corrosive environment. The products play a key role as there is a high cost of failure in environments where they are used and they can often be found in safety critical applications – like turning off values to prevent leaks or spills. The products are generally highly specialist and Rotork often has the leading market position in the areas where it operates. On top of this Rotork wraps a first-class customer service offering around the products to ensure they operate smoothly throughout their lifetime.
The Actuator, the product that Rotork is best know for, sits on top of a valve and operates that value. A lot of their actuators are sold to valve makers and they are value agnostic (they don’t make their own values). The products are highly specified and typically built bespoke. Almost 75% of valves are operated manually and so automation is a big growth driver of future sales.
Rotork operates in four different product segments and the company used to go to market this way although they have recently reorganised around a customer focussed sales strategy. The four areas are Electrical Actuators, Pneumatic and Hydraulic Actuators, Gearboxes and instrumentation. Electrical Actuators are the heart of the company and were their initial focus. Sales represent 50% of the business and they are the market leader in a concentrated market. Pneumatic and Hydraulic Actuators was the next area of expansion and they are the no.2 player. These products are often used in emergency applications. Gearboxes is a much less concentrated market and they are the market leader here too. Finally the company expanded into Instrumentation in 2011 following a series of acquisitions. These more standardised products measure or control pressure or flow.
In addition to the product sales Rotork offers an aftermarket service to maintain their products at their customer sites. This is managed by a team of 400/450 service personnel who, along with servicing the products, also act as sales agents for Rotork. Aftermarket accounts for 20% of sales and so is important to overall performance.
In terms of footprint, Rotork has offices in 30 countries and sells into 173 countries. There are 3,400 staff and 17 assembly facilities. EMEA and Asia Pacific are a similar size and account for c40% of sales with the balance coming from the Americas. In recent times the Asia Pacific region has been the fastest growing. In terms of end markets, the largest is the Oil & Gas sector which accounts for 48% of sales followed by Chemical, Process & Industrial and Water & Power which both account for 26% of sales.
Rotork has consistently demonstrated attractive financial characteristics and last year achieved 23.6% margins and a return on capital employed of 32%. It is highly cash generative and net cash on the balance sheet stood at £178m at the last year end although this has since come down following the post pandemic resumption of dividend payments and a £50m share buyback.
In the next few slides Rotork outlined what they consider to be the 5 components of their investment case, namely: providing innovative solutions to customers automation challenges; playing a key enabling part in the transmission to a more sustainable future; offering a diverse and inclusive environment for their employees (many who are shareholders); delivering strong financial performance in terms of high margins, ROCE, growth and cash generation; and adding to capabilities and geographical reach through targeted acquisitions.
Rotork believes it has an enabling role in creating a sustainable future in many different areas. Water management accounts for 25% of sales and Rotork provides products that help with leak management, wastewater treatment, desalination, improving water quality and flood prevention. In the moves to electrification, Rotork is aiding the Oil & Gas industry by enabling more of their facilities to be electrically powered vs traditionally been powered by oil or gas. They also work in emissions reduction and in the Hydrogen market – indeed the Hydrogen Infrastructure Market could potentially be bigger than Oil & Gas in the longer term.
Rotork has generated fairly consistent mid-single to low double digit sales growth over a long period of time. There have been a couple of down periods caused by reduced spending in the Oil & Gas sector on the back of lower oil prices and a general covid inspired reduction in spending. Sales fell in 2019 and 2020 but are expected to grow in 2021 and 2022 and they are confident that the Oil & Gas sector will see some catch up spending on their products. The Water & Power sector and the Chemicals, Process & Industrial sector should also see increased spend on the back of the continued development of the automation and electrification trends.
Management strategy to grow sales has the following pillars: a realignment of the sales force with customers (from products); increased use of the site service engineers to sell products and lifetime management of products; a focus on the higher growth regions (AP); further targeted investment in innovation and new product development (this has always been central to the strategy but recently spend has been more focussed).
Margins were generally greater than 25% between 2008 and 2014 but fell to 20% following a couple of acquisitions and the impact of a slight cyclical downturn. They have been recovering since and are expected to rise in 2021 to c 23/4%. The target is to take margins back to historical levels over the next few years.
A company presentation these days is not complete without reference to their ESG credentials and Rotork has 3 pillars to their framework; to operate responsibly; to enable a more sustainable future and to make a positive social impact. Interestingly management incentives include achievement of various ESG criteria illustrating a real commitment to this area.
The formal presentation ended with an update on current trading and Rotork continues to perform well. Orders are growing organically by high single digits and second half orders are likely to be better than H1. The Oil & Gas sector is later cycle in its recovery but management are optimistic it will come back. Issues within the global supply chain have had an impact in terms of disruptions and higher transportation costs. Second half revenues are likely to be similar to those achieved in the first half and margins continue to rise, helped by the price increases implemented earlier in the year. The recently announced appointment of Kiet Huynh, who has been running the Water & Power and Chemical and the Process & Industrial units, as the new CEO is not expected to lead to a change in current strategy.
This was an excellent introduction to Rotork, a high-quality business with attractive financial characteristics. The last couple of years they have shown great skill managing through a downturn in the Oil & Gas industry and the capex reductions due to Covid but they have come through in great shape and current trading suggests they are growing sales and margins again.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact email@example.com