Engineering consultant Ricardo’s (RCDO) £42.5 million deal to buy LR Rail creates a global rail consultancy with structural growth tailwinds at its back says chief executive Dave Shemmans.

Investors welcomed the acquisition, sending shares in the transport consultant 4.4% higher to 797p.

‘With accelerating global urbanisation Ricardo sees a strong and increasing demand for technical consulting and assurance services in the rail sector,’ the company says in a statement.

RICARDO - Comparison Line Chart (Rebased to first)

Boasting 440 rail engineers at offices across Europe, the Middle East and Asia, LR Rail provides rolling stock design, signalling and train control, intelligent rail systems, training and quality assurance services.

Contracts include advisory work on Crossrail and energy optimisation for Nederlandse Spoorwegen, the Netherlands' rail network.

Enlarged banking facilities have been put in place to fund the deal, which is expected to be immediately enhancing to underlying earnings.

Budgeted revenues at LR are £50 million in the next financial year, according to management, generating an earnings before tax, depreciation and amortisation (EBITDA) margin of 8%.

That implies around 7.5p per share of additional EBITDA in Ricardo's 2016 financial year, excluding the costs of the transaction.

Earnings per share at Ricardo are forecast at 41.5p for the 12 months ending June 2015, according to Oriel Securities analyst Ken Rumph. Upgrades to 2016 forecasts of 44.9p may be in the offing as the deal is expected to complete on 1 July.

Rumph rates the stock a ‘buy’ with a target price of 800p.

Shares previously flagged Ricardo on 6 March 2014 at 734p. Since then, the stock is up 10.6% including dividends, around 6% better than the FTSE All-Share.

Issue Date: 17 Apr 2015