Yes, the share price is down 26pc – but Spirax-sarco will profit from net zero emissions

Despite poor results, the engineering company is well placed to generate attractive total returns over the coming years

Another day, another set of disappointing company results. This time, the stock in question is engineering business Spirax-sarco. The FTSE 100 constituent reported a 17pc slump in pre-tax profits in its latest financial year as tough operating conditions weighed on its performance.

The company’s sales declined by 1pc on an organic basis but were bolstered by the contribution of acquisitions. This meant revenue was up 4pc year on year. But with lower sales in higher margin segments, the business recorded a 2.9 percentage point fall in its operating profit margin so that it stood at 20.7pc.

Given that its operating profit margin had previously declined by 1.7 percentage points in the prior year, from 25.3pc in 2021, its profitability has clearly come under sustained pressure over an extended period.

While this is hugely disappointing, it is also very understandable. The company faces a highly challenging trading environment across most of its geographical segments. Indeed, global industrial production growth amounted to a measly 0.3pc during 2023. This was far below upbeat forecasts made at the start of the year, with continued high interest rates having a negative impact on growth rates across major economies. Although this trend is likely to persist

Spirax-sarco HOLD

It expects to return to positive organic sales growth in the current year and also anticipates that its operating profit margin will expand following two years of decline in the short run, history shows that global economic growth is almost certain to return to its long-term average. Interest rate cuts are widely expected to be enacted over the coming years in response to the end of rampant inflation.

This should create stronger operating conditions for cyclical stocks and lead to a marked improvement in their financial performance.

Indeed, Spirax-sarco expects to return to positive organic sales growth in the current year. It also anticipates that its operating profit margin will expand following two years of decline.

It will aim to achieve these goals via a revamped management team, since a new chief executive and chief finance officer were recently appointed, while a new chairman is expected to be in place by the end of the year.

While wholesale management change represents a risk for investors, the company’s solid financial position, as demonstrated by a net gearing ratio of 66pc and net interest cover of seven, and sound competitive position, as evidenced by a return on equity of 16pc despite the aforementioned slump in profits, highlight its highquality status. When combined with an anticipated increase in the rate of industrial production growth during the current year, its future prospects are highly appealing.

In fact, the same reasons for its

‘The company’s solid financial position and sound competitive position highlight its high-quality status’

original inclusion in our Wealth Preserver portfolio during July 2021 still stand. The company remains well placed to capitalise on the world’s push to achieve net zero, while its broad range of customers and capacity to increase the efficiency of its clients’ processes continue to have significant appeal. Although the company’s shares have yet to yield a positive return, with them currently down 28pc since being added to our portfolio, their long-term prospects remain upbeat.

Trading on a forward price-toearnings ratio of 31, Spirax-sarco is relatively expensive. But with its bottom line due to rise by 15pc next year and likely to be positively catalysed thereafter by margin improvements amid a more sanguine global economic outlook, it continues to merit a place in our portfolio.

Update: Greencoat UK Wind Our Wealth Preserver holding in Greencoat UK Wind is also yet to

♦ Market value: £7.5bn

♦ Turnover (Dec 2023): £1.7bn

♦ Pre-tax profits (Dec 2023): £245m

♦ Yield (Dec 2023): 1.6pc

♦ Most recent year’s dividend: 160p

♦ Net debt (Dec 2023): £763m

♦ Return on capital (Dec 2023): 10pc

♦ Cash conversion ratio (Dec 2023): 105pc

♦ P/E ratio (Dec 2023): 32.2

deliver on its long-term potential. The wind farm operator’s shares are up just 2pc since being added to our portfolio in August 2021, although they have paid dividends of 17pc of our notional purchase price. This is roughly in line with inflation over the same period.

Its shares continue to trade significantly below net asset value (NAV), with their discount currently standing at 15pc. This is despite the company’s NAV declining by 3p per share in its latest financial year, which was partly due to an increase in the discount rate used in response to higher interest rates.

With the stock currently yielding 7.2pc, it continues to offer a relatively high income return. And while the popularity and prospects for renewables are likely to ebb and flow over the coming years, the world’s move towards net zero is unlikely to abate. Therefore, given the company’s low valuation and income appeal, it will remain a holding in our portfolio.