Acquisition Of Noah Actuation Will Expand Product Offerings In Water & Power And CPI Segments

Key Takeaways

• The acquisition and strategic growth in services suggest enhanced revenue potential and improved margins, driven by expanded offerings and market reach.
  
• Strong financial position and Growth+ strategy supports sustained shareholder returns, leveraging investments in electrification, automation, and sector cycles.
  
• Currency fluctuations, new system costs, decreased mining revenue, and tax rate hikes pose risks to Rotork's profits and financial stability.

Catalysts

Designs, manufactures, and markets industrial flow control and instrumentation solutions for the oil and gas, water and wastewater, power, chemical, process, and industrial markets worldwide.

• The acquisition of Noah Actuation is expected to fill product gaps and enhance synergy, particularly in the Water & Power and CPI segments, potentially driving future revenue growth through expanded product offerings and market reach.
  
• Rotork's service business has shown a consistent growth trajectory, growing at a 14% CAGR over three years and contributes 23% to group revenues, indicating strong future potential for enhancing service-related revenue and improving net margins through high-margin service offerings.
  
• The strong order momentum, particularly in the second half of 2024, with all divisions delivering growth, suggests continued revenue expansion into 2025 and beyond, benefiting from ongoing investment cycles in key sectors like Water & Power and Oil & Gas.
  
• The Growth+ strategy’s focus on Target Segments, such as electrification and automation within Oil & Gas and CPI, is projected to deliver mid
• to high single-digit revenue growth with a mid-20s operating margin, thereby enhancing earnings and operating leverage.
  
• The strategic flexibility provided by a strong balance sheet and disciplined capital allocation, including another share buyback and the acquisition pipeline, indicates potential for enhanced shareholder returns and increased earnings per share through both organic and inorganic growth initiatives.

Rotork Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rotork's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 16.8% in 3 years time.
• Analysts expect earnings to reach £147.3 million (and earnings per share of £0.18) by about April 2028, up from £103.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.0x on those 2028 earnings, up from 22.6x today. This future PE is greater than the current PE for the GB Machinery industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Rotork Future Earnings Per Share Growth

Risks

• The company is experiencing foreign exchange translation headwinds, potentially impacting future revenue and profit reporting due to currency fluctuations.
  
• The implementation of a new ERP system has seen costs rise significantly, which could pressure short-term net margins if not managed effectively.
  
• CPI segment revenues decreased year-on-year due to reduced nickel mining project activity, indicating reliance on specific projects or sectors can impact revenue stability.
  
• Investment in the new China factory appears high, potentially straining capital expenditure and affecting free cash flow if expected efficiencies are not realized.
  
• Adjusted effective tax rates have increased due to rising U.K. tax rates, which could pressure net earnings if not offset by other financial efficiencies.

Valuation

• The analysts have a consensus price target of £3.835 for Rotork based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.4, and the most bearish reporting a price target of just £3.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £877.9 million, earnings will come to £147.3 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 7.3%.
• Given the current share price of £2.77, the analyst price target of £3.84 is 27.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.