Ricardo: becoming more dependent on its Performance Products unit in H1 FY19

/ March 6, 2019/ Ricardo

Ricardo published its H1 FY19 results, which were in line with its trading update of January 2019. Ricardo’s revenues were GBP 188m, up 3.7% yoy and up 2% yoy at CC/CS. Its adjusted operating margin was 8.8%,  slightly down, by 10 bps yoy.

Its Performance Product unit continued to drive growth: revenues of the unit were GBP 51m, up 25.6%, thanks to the McLaren engine supply contract (with the number of engines delivered in H1 FY19 up 40% yoy).

Ricardo’s core business, Technical Consulting has a difficult H1 FY19, with revenues down 2.6% to GBP 137m. The decline in revenues resulted from a poor performance in the U.K., continental European and US automotive markets. The company experience growth, within Technical Consulting, in its diversification areas: rail, energy & environment, defense performed well, along with automotive China. Unfortunately, Ricardo does not provide revenue breakdowns of its Technical Consulting unit and it is not quite clear why Ricardo is under-performing in a still booming automotive market, globally.

Ricardo does disclose however order intake (contract booking) information. This booking information provides some information about the likely evolution of Ricardo’s revenues. Bookings were GBP 202m in H1, down 15%. Bookings in automotive (across both Performance Products and Technical Consulting) were down 47%. Performance in diversification areas was disappointing with energy & environment flat, and rail down 40%. Finally, high-performance vehicles & moto was up 29% and defense up 189%, largely driven by new Performance Products contracts, we think.

Ricardo has not issued any guidance for full-year FY19. However, based on the booking information and qualitative information from the management, Ricardo is likely to have an H2 very much in line with H1, with an accelerated decline in the revenues of Technical Consulting and continued strong growth in Performance Products. What is worrying is that the outlook for the sector diversification in Technical Consulting did not work this semester and will not work either, based on booking analysis, in H2 FY19.

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