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Rotork is a market-leading global provider of mission-critical intelligent 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 £2.8bn and are a constituent of the FTSE 250 index.
We were delighted to welcome CEO Kiet Huynh, CFO Ben Peacock and Director of Investor Relations Andrew Carter, to the latest Yellowstone Advisory webinar to present the full year 2023 results. A recording of the webinar is available here.
The presentation started with the key drivers that underpin Rotork’s growth strategy and why they are confident they can deliver mid to high single digit revenue growth. The first growth driver is the company’s’ exposure to three industrial megatrends: Automation; Electrification and Digitalisation. These mega trends are coupled with the Growth+ strategy which consists of three pillars: Target Segments; Customer Value and Innovative products and services. The Growth+ strategy and exposure to industrial megatrends are both underpinned by the foundations of enabling a sustainable future.
Rotork delivered a strong financial performance in 2023 and had a particularly strong second half. Revenue growth came in at almost 14% (OCC), ROCE improved to 33.9%, the margin grew 60bps to 22.9% and the company ended the year with net cash of £134m after achieving 120% cash conversion. The company also announced a £50m share buy back and is confident that they have a flexible balance sheet that can cope with potential M&A opportunities. They were also particularly pleased with their performance on a couple of non-financial measures and highlighted the improvement in Lost Time Injury Reported (LTIR) and their receipt of a “AAA” rating from the MSCI for their ESG performance. Rotork is particularly pleased that they have been able to make progress on their sustainability targets alongside delivering financial returns and highlighted that Scope 1 and 2 emissions have been reduced by 11%.
We were then reminded of the key components of the Growth+ strategy which has been so successful since its launch. The target segments are niche markets with good growth, where Rotork has market leading products and which have the capability to produce good profits. Other segments aren’t being ignored but the target segments are the clear focus for achieving their growth aspirations. The customer value pillar is all about putting the customer at the centre of everything they do to deliver a great customer experience. The third pillar is about providing innovative products and services into the segments they serve. Rotork is seen as having leading products and to maintain this position the company will continue to innovate to stay ahead of the competition. Again, everything is underpinned by the enabling sustainability philosophy.
Target segments represent around 50% of total sales and grew c15% occ in 2023 compared to the market growth rates of these target segments of high single digits. Examples were then given of the target segments and what mega trends impact them. The Oil & Gas industry is undergoing upstream electrification as one of the ways to reduce emissions. Rotork has developed actuators which replace manual and pneumatic valves and provide lower methane emissions and these products are growing strongly. The Chemical Process and Industrial division is targeting niche markets that are growing fast and one such area is the battery value chain, where a significant increase in battery production has been identified. Products and solutions are being delivered into minerals processing for the batteries, speciality chemicals for cathodes and anodes and HVAC systems that help manage battery plants. Within Water and Power they are providing specialist actuators and gearbox combinations into water treatment plants, and during the year won a large order for equipment used to provide potable water in the Middle East.
Looking at upstream electrification in more detail, Rotork introduced their methane emissions reduction initiative 18 months ago. They are targeting upstream wellheads and production processes and are replacing manual and pneumatic valves with their new electrical actuator products to great effect. In a short space of time, they have grown their market share in the electric actuation of well head choke valves to above 50%. Rotork estimate the upstream electrification market size is around £200-£300m at maturity and the ramp to this level could be accelerated by the recent COP28 rules and commitments.
More detail was then provided on the Chemical Process and Industrial (CPI) sector. Here Rotork provides actuators and instruments for niche critical process automation sectors. The approach here is to identify structurally growing markets, work with business development within these markets, develop strong customer relationships to enable Rotork products to become specified and then win new business. The other way they look to grow revenue is where they have small market shares in growing niche markets and they look to grow their share of these markets. This process has been in place since 2020 and delivered 11.4% CAGR since then and this good growth is expected to continue. The biggest subsector is the process part followed by the chemical and speciality chemical sub sectors and these have shown the strongest growth.
Moving onto the outlook, the company has a positive view on the prospects for all their end markets. Within Oil & Gas, Rotork sees a catch up on recent underinvestment. Within CPI, the focus is on fast growing end markets with strong structural drivers. Water & Power have had good growth drivers for a number of years and this is expected to continue. Replacing aged infrastructure and investing in new water infrastructure to improve water availability is expected to continue for some time. Rotork has good exposure to water recycling, desalination and reuse. The Power sector has been reducing for Rotork although in 2023 it grew in line with Water for the first time in a few years and this is linked to the increase in demand for energy security.
So, in summary Rotork delivered a strong set of results in 2023 and there is ample evidence that the Growth+ strategy is working. The company enters 2024 with good momentum and a healthy order book and they are expecting a year of good progress. Rotork is a first class engineering company with market leading products that is now developing a trend of consistent delivery.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com