Ricardo Suffers from its Exposure to Automotive in FY20
Familiar Story: Ricardo Suffers from its Exposure to Automotive
Ricardo paid the price for its exposure to the automotive sector, which represents 55% of total revenues. After a stable H1 FY20 (the ending June 30, 2020), H2 collapsed with revenues down 23% at cc/cs (our estimate). Surprisingly, Ricardo performed worse than an automotive pure-play such as EDAG (-14.8% during the same period) and Akka (-20.3% at cc/cs).
For the full-year FY20, Ricardo’s revenues were down by 8.4% and down 12% at CC/CS. Ricardo’s adjusted EBIT margin went down to 5.7% (-460 bps).
Automotive was down by 21.9%, across its engineering services (E&I) (-18.1%), Performance Products (-27.7%), and its consulting and software unit (-19.1%). E&I suffered the most in the US. Performance Products (e.g., the manufacturing of McLaren engines) went quiet as plants closed.
Ricardo continues to transform its automotive presence. The company has sold its testing facility in its Detroit Technology Campus (DTC) and continues to look for a buyer its second building at the DTC. It also sold its Santa Clara Technical Center. The company is also investing GBP 10m in restructuring costs for E&I across US, UK, Europe, and China.
Diversification Sectors Do Well Despite Rail
Ricardo did better in its diversification sectors: non-automotive was up by 15.8%, although this included M&As. Defense (mostly for the US government) did very well (+30.2%). Energy/Environment was also solid (+13.9%, and +9.0% at cs) thanks to its public sector and water utilities client base. The COVID-19 had no impact on E/E operations. Railway was, unsurprisingly, down (-7% at cs) in engineering and, to a lesser extent, in its certification business.
Flat Growth Ahead
With the pandemic and the likely hard Brexit, Ricardo will probably accelerate its client diversification, away from its core A&I capabilities to new sectors and new geographies. E/E and Defense have good short-term growth prospects and represent ~25% of revenues. The immediate future of Rail is mixed, with the fall in passenger transportation putting on pause engineering activities. Ricardo had significantly invested in Rail, which is its largest non-automotive unit (~21% of revenues). The company has, therefore, two growth engines, rather than three. We think Ricardo will remain for the next two years a story of flat growth in a gradually recovering market.