5th Mar 2015 11:37
LONDON (Alliance News) - Spirax-Sarco Engineering PLC on Thursday added its name to the list of UK engineering companies which saw results held back by the strength of sterling in 2014, with the company reporting a broadly flat pretax profit, though the company sweetened the pill with a GBP91 million return of capital and its robust underlying results saw shares in the company surge.
FTSE 250 constituent Spirax-Sarco said its pretax profit for 2014 edged down to GBP144.8 million from GBP145.7 million last year, as revenue fell to GBP678.3 million from GBP689.4 million. At constant exchange rates, revenue rose by 5%, the company said.
Despite the fall in pretax profit, the company said it will increase its final dividend payment to 45 pence per share, from 41 pence last year, meaning its total dividend for the year will be 64.5 pence, up 9% on the 59 pence per share paid a year earlier.
In addition to the dividend hike, the company said it would return GBP91 million to shareholders via a special dividend, translating to 120 pence per share.
Shares in Spirax-Sarco were up 8.3% to 3,339.00 pence on Thursday, one of the best performers in the FTSE 250.
"The good results in 2014 again demonstrate the fundamental strengths and resilience of our business, with record profits and margin improvement achieved against an unhelpful economic background and a stiff currency headwind," said Chief Executive Nick Anderson.
"We are increasing investment and adding resources in support of our growth strategy and we are confident that, through these actions, we can continue to outperform our markets and deliver further improvements in our business," Anderson added.
Spirax-Sarco said overall market conditions in 2014 were "lacklustre", with industrial production growth slowing in the second half of the year in both developed and developing markets. It does not expect much improvement in those market conditions in 2015 and, based on current exchange rates, anticipates a further currency headwind of around 2% to its sales this year, with a weaker euro outweighing any benefits from a stronger dollar.
Reported revenue came down across Spirax-Sarco's regional operations but increased when currency translation effects are stripped out.
Europe, Middle East and Africa revenue was down 3% on a reported basis, following a deterioration in industrial production activity in the second half. The wider market was hit by the turmoil in Ukraine and the subsequent imposition of sanctions in Russia. Though the countries only account for 1% of group sales, the problems increased market uncertainty and some loss of customer confidence in associated markets in Germany and the Nordic region.
But the group said it did make progress in the German, Italian, Spanish and UK markets in the year, with overall sales and profit improving. Italy proved a highlight on the back of large contract wins, while UK sales increased despite a tough-to-beat year-earlier comparison.
But French sales declined, reflecting the "very poor" market conditions, and the group saw a big decline in project business, including a fall in refining and petrochemicals sector activity in Russia. It also recorded less project work in the Middle East due to the non-recurrence of hospital work carried out in 2013.
Some of the company's smaller markets in Africa also were impacted by the heightened security risks caused by the outbreak of the Ebola virus in West Africa.
Spirax-Sarco was given a boost by its Watson-Marlow Fluid Technology Group subsidiary, where revenue increased both on a reported and constant currency basis. Sales in the unit were pushed higher by a 4% contribution from the acquisition of BioPure, the single-use tubing manufacturer. It also registered strong sales for its Flexicon filling systems and Watson-Marlow core pumps and tubing products.
Americas revenue was down 4% on a reported basis but rose 8% in constant currencies, with a strong performance in North America, where Spirax-Sarco improved margins by shifting away from lower-margin project and service work. Latin America was held back by weak market conditions, particularly in Brazil and Argentina, which was offset by good performances in its Mexican and Chilean businesses.
Asia Pacific revenue followed the prevailing pattern, down on a reported basis but up in constant currencies. Sales growth improved in the second half as a large number of projects in Korea were shipped, Spirax-Sarco said, but this was held back by tougher trading conditions in the second half. The Korean business performed well in the year, with sales in China flat and progress made in both Japan and Australia.
In a separate statement Thursday, Spirax-Sarco added it will start direct operations in India and will exit its existing joint venture in the country.
Spirax-Sarco said it will sell its stake in its joint venture with Forbes Marshall Pvt Ltd to its partner for GBP6.5 million in cash. This will be replaced by a direct sales team in India, which is currently preparing to start operation by the middle of 2015.
Investec put its target price, recommendation and estimates for Spirax-Sarco under review, saying the company has again demonstrated its ability to perform well, even against a backdrop of weak end-markets.
Spirax's flat 2014 pretax profit hides good progress for the business, particularly in its Americas business and its Watson-Marlow peristaltic pumps business, Investec argued.
Though Investec has put its Add rating, 3,000 pence price target and 2015 estimates under review, it expects to retain a neutral to positive stance on the shares, despite the likelihood of the results putting some upward pressure on its valuation.
Liberum also noted the underlying growth in the business, not only in the Americas and in Watson-Marlow, but also in the new direct sales venture the company has announced in India, which has the potential to boost the group's Asian performance.
It reckons the backdrop in end markets for 2015 will be broadly similar to 2014, but does expect further progress for Spirax-Sarco.
Liberum keeps its Hold rating on the stock and a 2,840 pence price target.
By Sam Unsted; [email protected]; @SamUAtAlliance
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