Spirax-Sarco Engineering plc. A selective buy, on price dips.
Spirax-Sarco Engineering plc (SSE) is a FTSE250 London Stock Exchange registered company. SSE has a current market capitalisation of £2.25 billion at 2985p a share (September 23, 2013); it pays an annual dividend of 55p (yield 1.8%) on current earnings (profits) per share of 125.6p.
SSE is a global niche engineering company, employing around 5,000 staff. Its two principal activities are producing industrial solutions based on steam processes and manufacturing niche industrial/commercial pumps.
SSE operates out of 36 countries and sells their products in over 100 countries globally.
History and business unit analysis.
SSE started out in 1888 as a manufacturer of “steam traps” based in London. Steam traps are effectively valves and associated mechanisms that capture and get rid of the condensation (liquid water) produced by steam based industrial processes. Effectively by capturing this liquid water, steam traps make steam processes more efficient and effective.
Clearly since 1888 SSE’s steam based industrial solutions have greatly evolved, but for the layman considering what SSE do really the above summarises the position. That is they manufacture and maintain industrial steam based processing solutions, which make the industrial or commercial steam process both more efficient and effective.
SSE is split into two main business lines. Spirax-Sarco which manufactures industrial steam process solutions and Watson-Marlow which manufactures niche industrial & commercial pumps, for the transport of liquids within manufacturing processes.
Spirax-Sarco Steam Processes. This unit comprises 81% of SSE's revenues and 75% of profits. Spirax-Sarco’s steam process business is highly diversified at both a geographic and on a industrial sector basis. 45% of revenues are generated in Europe, Africa & the Middle East, 30% in Asia Pacific and 25% in the Americas. On a customer sector basis Spirax-Sarco also has a very broad industry coverage, this makes it less impacted by down turns in any one sector.
Spirax-Sarco’s largest customer sector is the food-processing industry, which comprises 12% of sales. Their steam solutions are heavily used within the food-processing sector, given the need to sterilise products/equipment and transfer heat for cooking etc. Other customer sector uses are:
Large scale heating, ventilation and cooling systems.
Effectively their niche specialism grants them a very broad industry exposure and thus growth rates tend to follow global expansion. And the need that manufacturers have to acquire specialist plant and tools to create their end products.
Watson-Marlow produces niche pumps used for the transmission of liquids within specialised industrial and commercial processes. Watson-Marlow has higher profit margins than Spirax-Sarco; it generates 19% of group revenues but 25% of profits. Watson-Marlow’s products fit neatly with Spirax-Sarco, with their niche pump sector covering a very wide, but similar geographic footprint and customer base. This aids the cross selling of their products by the group SSE sales team. For example, Watson-Marlow also generates its largest revenues from the food-processing sector, with their specialised pumps being used to transport and mix highly viscose food processing products, without clogging up.
SSE’s product mix puts it in a very favourable position to benefit from the growth in emerging market manufacturer demand, for the plant & machinery needed to grow those country’s manufacturing sectors. In addition the niche nature of their products means competition is low and industry margins are high. The on going maintenance and repair of products generates a significant proportion of their revenue, as does their focus to customise products to improve process efficiency and reduce maintenance disruption.
SSE’s product mix has led to over 40% of revenues being generated from sales to emerging market countries.
Financials
SSE has had consistently strong financial and cash flow results, with a 45-year history of ever increasing dividends and also periodic special dividend payments, when cash flow allows.
SSE’s results for the 6 months to June 30 2013 showed revenue up 6% and adjusted profit per share up 20%. This largely reflected a huge improvement in margins in Europe, derived from an efficiency initiative started 12 months ago (European profits rose 41%). Profits over the last 3 years have risen on average by around 9% per annum, despite the recession.
As at 30 June 2013 SSE had no net debt, indeed they had net cash on their balance sheet of £ 57.4m (up £6m over 6 months). However in July 2013 SSE paid a 100p per share special dividend, to return excess cash to shareholders. The £78.1m cost of this dividend can be expected to result in net debt of around £10m in H2 2013, which is nominal given the expected full year 2013 profit of plus £ 150m.
The business also hiked the H1 2013 dividend by 13% to 18p a share.
All in the company has an excellent profit and cash generation history and good future potential. This is especially pertinent given it has achieved this within a challenging economic environment, an environment which is now entering a more favourable phase.
Summary & Recommendation
SSE has a great business model, within a niche global and growing market. It is diversified and thus able to grow despite challenging economic conditions, as the history of the last 3 years has shown.
Its focus on niche steam and pump industrial and commercial process applications, means it has and will benefit from the spread of industrialisation within emerging market economies. SSE’s strategy of basing its manufacturing centres close to the customer in Asia, Europe & the Americas, means it can react quickly to fickle customer demand, tailor its products to that demand, as well as minimise transportation costs and trade barriers.
I like the model and I envisage further rapid growth potential, especially as global growth rates accelerate in the period 2014-16.
SSE’s shares have however already enjoyed a large-scale increase in 2013 (up 36% over their price 12 months ago in September 2012) and thus I am a selective buyer of their shares, only on dips below 2950p a share.
The 55p dividend is good, generating a yield of 1.9% (2950p entry price) and it is likely to see consistent increases of 6-12% per annum for the next 3 years.
I envisage full profits for 2013 will come in within a range of £148m - £154m, up 9% - 13% on 2012.
I see profits over the next 3 years rising by 10-12% per annum, with the aid of increased emerging market growth and indeed wider global manufacturing growth and retooling rates.
On this basis I have a target exit price range for SSE of 3800p to 4200p with a 2016 to 2017 target date.
UPDATE: Purchased SSE shares on October 8, 2013 at 2911p a share.
Summary: SSE buy on price dips below 2950p. Exit price 4000p in 2017.
SSE is a global niche engineering company, employing around 5,000 staff. Its two principal activities are producing industrial solutions based on steam processes and manufacturing niche industrial/commercial pumps.
SSE operates out of 36 countries and sells their products in over 100 countries globally.
History and business unit analysis.
SSE started out in 1888 as a manufacturer of “steam traps” based in London. Steam traps are effectively valves and associated mechanisms that capture and get rid of the condensation (liquid water) produced by steam based industrial processes. Effectively by capturing this liquid water, steam traps make steam processes more efficient and effective.
Clearly since 1888 SSE’s steam based industrial solutions have greatly evolved, but for the layman considering what SSE do really the above summarises the position. That is they manufacture and maintain industrial steam based processing solutions, which make the industrial or commercial steam process both more efficient and effective.
SSE is split into two main business lines. Spirax-Sarco which manufactures industrial steam process solutions and Watson-Marlow which manufactures niche industrial & commercial pumps, for the transport of liquids within manufacturing processes.
Spirax-Sarco Steam Processes. This unit comprises 81% of SSE's revenues and 75% of profits. Spirax-Sarco’s steam process business is highly diversified at both a geographic and on a industrial sector basis. 45% of revenues are generated in Europe, Africa & the Middle East, 30% in Asia Pacific and 25% in the Americas. On a customer sector basis Spirax-Sarco also has a very broad industry coverage, this makes it less impacted by down turns in any one sector.
Spirax-Sarco’s largest customer sector is the food-processing industry, which comprises 12% of sales. Their steam solutions are heavily used within the food-processing sector, given the need to sterilise products/equipment and transfer heat for cooking etc. Other customer sector uses are:
Large scale heating, ventilation and cooling systems.
- The Brewing industry
- Petro Chemicals & Refining
- Pharmaceutical & Bio-technology industry
- Healthcare
- Water treatment
- Semi conductor industry (humidity & contaminant controls).
- Chemicals
- Mine processing
Effectively their niche specialism grants them a very broad industry exposure and thus growth rates tend to follow global expansion. And the need that manufacturers have to acquire specialist plant and tools to create their end products.
Watson-Marlow produces niche pumps used for the transmission of liquids within specialised industrial and commercial processes. Watson-Marlow has higher profit margins than Spirax-Sarco; it generates 19% of group revenues but 25% of profits. Watson-Marlow’s products fit neatly with Spirax-Sarco, with their niche pump sector covering a very wide, but similar geographic footprint and customer base. This aids the cross selling of their products by the group SSE sales team. For example, Watson-Marlow also generates its largest revenues from the food-processing sector, with their specialised pumps being used to transport and mix highly viscose food processing products, without clogging up.
SSE’s product mix puts it in a very favourable position to benefit from the growth in emerging market manufacturer demand, for the plant & machinery needed to grow those country’s manufacturing sectors. In addition the niche nature of their products means competition is low and industry margins are high. The on going maintenance and repair of products generates a significant proportion of their revenue, as does their focus to customise products to improve process efficiency and reduce maintenance disruption.
SSE’s product mix has led to over 40% of revenues being generated from sales to emerging market countries.
Financials
SSE has had consistently strong financial and cash flow results, with a 45-year history of ever increasing dividends and also periodic special dividend payments, when cash flow allows.
SSE’s results for the 6 months to June 30 2013 showed revenue up 6% and adjusted profit per share up 20%. This largely reflected a huge improvement in margins in Europe, derived from an efficiency initiative started 12 months ago (European profits rose 41%). Profits over the last 3 years have risen on average by around 9% per annum, despite the recession.
As at 30 June 2013 SSE had no net debt, indeed they had net cash on their balance sheet of £ 57.4m (up £6m over 6 months). However in July 2013 SSE paid a 100p per share special dividend, to return excess cash to shareholders. The £78.1m cost of this dividend can be expected to result in net debt of around £10m in H2 2013, which is nominal given the expected full year 2013 profit of plus £ 150m.
The business also hiked the H1 2013 dividend by 13% to 18p a share.
All in the company has an excellent profit and cash generation history and good future potential. This is especially pertinent given it has achieved this within a challenging economic environment, an environment which is now entering a more favourable phase.
Summary & Recommendation
SSE has a great business model, within a niche global and growing market. It is diversified and thus able to grow despite challenging economic conditions, as the history of the last 3 years has shown.
Its focus on niche steam and pump industrial and commercial process applications, means it has and will benefit from the spread of industrialisation within emerging market economies. SSE’s strategy of basing its manufacturing centres close to the customer in Asia, Europe & the Americas, means it can react quickly to fickle customer demand, tailor its products to that demand, as well as minimise transportation costs and trade barriers.
I like the model and I envisage further rapid growth potential, especially as global growth rates accelerate in the period 2014-16.
SSE’s shares have however already enjoyed a large-scale increase in 2013 (up 36% over their price 12 months ago in September 2012) and thus I am a selective buyer of their shares, only on dips below 2950p a share.
The 55p dividend is good, generating a yield of 1.9% (2950p entry price) and it is likely to see consistent increases of 6-12% per annum for the next 3 years.
I envisage full profits for 2013 will come in within a range of £148m - £154m, up 9% - 13% on 2012.
I see profits over the next 3 years rising by 10-12% per annum, with the aid of increased emerging market growth and indeed wider global manufacturing growth and retooling rates.
On this basis I have a target exit price range for SSE of 3800p to 4200p with a 2016 to 2017 target date.
UPDATE: Purchased SSE shares on October 8, 2013 at 2911p a share.
Summary: SSE buy on price dips below 2950p. Exit price 4000p in 2017.
