Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
Article summary:
- Engineering consultancy Ricardo shows mixed results but positive underlying sales and profit growth.
- Springfield Properties faces challenges but benefits from reduced debt and a focus on affordable homes.
- Close Brothers struggles with regulatory issues, yet its balance sheet remains strong despite share price decline.
Engineering consultancy Ricardo is yet to fully reward this column’s patient support. Even though dividend payments cover the paper loss since our tip, we would have been a fifth better off just putting our faith in a FTSE All-Share index tracker.
However, last week’s full-year results to the end of June offered more than enough to keep us interested in the fortunes of the Sussex-based company, even if the headline numbers were rather mixed and the outlook statement measured rather than out-and-out bullish.
A further £26m of exceptional items relating to ongoing restructuring programmes, a disposal and the integration of acquisitions mean the results for the fiscal year 2024 require some careful study.
The good news is that on an underlying basis, sales and profit margins were up, cash conversion was good, and the dividend grew, while net debt declined.
Ricardo is set for healthy profit growth and a more transparent investment case thanks to a trio of factors pushing into 2025 and beyond. Its order book offers good visibility on the pipeline for the business, its automotive and industrial operations are showing signs of improved momentum, and the firm’s margins are growing as a result of restructuring further towards consulting, alongside general cost efficiencies.
Management’s goal to double underlying operating profit in the five-year period from 2023 to 2027 implies a figure of £68m (compared to the £38.8m recorded in fiscal 2024).
Adjust that figure of interest and tax and resulting earnings per share figure would leave Ricardo on a single-digit price-to-earnings multiple – a rating that would feel low for a nicely cash-generative business.
With a healthy balance sheet and the relatively predictable revenue streams that result in its expertise such as water, rail and energy and environmental projects, Ricardo could be about to hit top gear.
Questor says: buy
Ticker: RCDO
Share price: 448p
Update: Springfield Properties
Scottish housebuilder Springfield Properties is another member of the portfolio that is currently yielding a paper loss, in this case quite a nasty one. But the combination of last week’s full-year results, the prospect of gently looser monetary policy, and a lowly valuation is enough to keep us more than interested.
A one-fifth drop in sales and a one-third drop in both pre-tax income and earnings per share for the 12 months to May 2024 may not sound like much of a foundation for an investment case, but net debt came down by a third as well.
As regular readers will know, this column believes that less debt means less risk and less risk can mean a higher multiple of earnings, all other things being equal.
If earnings start to turn up at the same time, you can get a highly geared share price recovery, which may just be underway at Springfield Properties, where higher reservation rates offer grounds for hope of better times ahead, as do the company’s cost-cutting drive and shrewd focus on affordable homes in a market where demand continues to outstrip supply.
Lower interest rates would be a further boost to affordability and higher volumes would enable Springfield to maximise the value of its 5,593 plots that already have planning permission – total completions in the year just ended came to 878.
The restoration of dividend payments, albeit at a penny a share, points to improved confidence in the boardroom and, should the recovery take longer to develop than expected, the stock’s valuation will hopefully provide us with some downside protection.
Springfield’s stock market value is £128m and that represents an 18pc discount to the £152.5m of tangible net assets on the balance sheet (which include no less than £244m in inventories).
Questor says: hold
Ticker: SPR
Share price: 110.8p
Update: Close Brothers
The Financial Conduct Authority’s investigation into discretionary commission arrangements (DCA) in the car financing market continues to cast a huge cloud over the share price of merchant bank Close Brothers.
Last week’s sale of the asset management business is not pleasing everyone thanks to the lower-than-expected price tag.
It is going to be a long haul back for the share price and thus this column, especially as no dividends are currently forthcoming, but the balance sheet and valuation both argue against any decision to cut and run (as does the book loss that would accrue).
The disposal boosts Close Brothers’ common equity tier 1 (CET) ratio while the £750m stock market value compares to tangible net assets of more than £1.5bn, so that 50pc-plus discount already prices in a very negative outcome from the regulatory investigation.
Questor says: hold
Ticker: CBG
Share price: 404.2p
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