A positive reaction to broadly in-line full-year results from FTSE 250 engineer Rotork (ROR) suggests the market continues to put a premium on quality - the shares up 4.4% to £27.58.
The Bath-headquartered firm has a leading market share in the manufacture of valve actuators - devices which manage the flow of liquids, gases and powders - for large industrial customers. The company has a particular bias towards the oil and gas sector. Sales to this industry increased 24% in 2013 and now represent 59% of group revenue.
Rotork enjoys strong cash generation, excellent visibility and resilient margins and the shares trade on a 2014 price to earnings ratio of 21 following this morning's advance.
Looking at the headline numbers in detail, pre-tax profits gain 11.1% year-on-year to £138 million. Operating cashflow as a proportion of operating profit increases to 99.6% from last year's 95.4% and net cash is up 15% to £68.9 million. Order intake is up 7.3% and the order book marks a new record, advancing 3.8% to £187.8 million. The operating margin rises 0.4% to 26.2%.
Rotork says it will experience weakness in some areas during 2014 due to economic conditions and currency headwinds as it translates overseas profits into sterling but overall 'is confident of achieving further progress in the coming year'. This confidence is reflected in a 11.7% increase in the dividend to 48.05p.
The results are boosted by a number of acquisitions and today the company also announcesthe £64 million purchase of South Korean valve accessories maker Young Tech. The deal is funded from cash reserves and existing bank facilities.
Investec notes Rotork has 'confounded concerns that its exposure to the oil & gas sector would drag its performance down' and although the broker puts its 'buy' rating and £30 price target under review, it also adds its positive stance 'is likely to be maintained'.
Numis reaffirms its add advice and £32 target, saying: 'We continue to view Rotork as a high quality, cash generative business and maintain our fundamental positive stance.'
Liberum is far more cautious on valuation grounds, reiterating its own 'sell' advice and £25 target. It comments: 'The shares now trade on a 2014 EV/EBIT (enterprise value to earnings before interest and tax) of 13.7 times, representing a 38% EV/EBIT premium to the oil services sector, a 12% premium to the engineers and 25% above its long term average.'
