Ricardo – New CEO, New Strategy, New Priorities

/ August 28, 2022/ Automotive, Investor Update, M&As (small under $50m in revenues), Ricardo, Sustainability, UK

New Ricardo CEO Reshuffled its Strategy

Ricardo announced a new strategy and priorities under its new CEO, Graham Ritchie. The company wants to shift its services portfolio to sustainability, digital, and mobility across all business units. It will raise its profitability level, targeting an operating margin in the mid-teems by FY27 (ending June 30), thanks to portfolio management, lower SG&As, and more focus.

‘Established’ Activities Target Margin Expansion

In detail, Ricardo will differentiate its activities between ‘established’ and ’emerging’ ones. ‘Established’ activities include most of its Automotive & Industrial (A&I) unit (29% of revenues), Performance Products (22%), and Defense (11%). Ricardo will relocate the delivery to China and set up back-office shared services centers to reduce costs. The company targets an operating margin above 10% in FY27. Growth will be muted (mid-single digit growth on average). ‘Established’ activities will focus its portfolio on niches. Commercial expansion to the U.S. will be the priority.

‘Emerging’ Activities Will Drive Growth and Profits

The ’emerging’ portfolio includes A&I’s electric vehicle and new mobility portfolio, Rail (22%), and the high-growth Energy and Environment (16%). Growth is, of course, on the agenda. Ricardo targets an annual growth above 10% for its ‘established’ activities. Profits will reach a ‘high teens’ profit margin. ‘Emerging’ will account for 75% of Ricardo’s total profit by FY27.

Execution Focus Before M&As

Ricardo’s short-term priority is operations and margin expansion, with A&I its priority. Also, the company will accelerate its portfolio shift to ’emerging’ activities. The company will then accelerate its growth through M&As. We think the U.S., along with Australia, will be the priority. However, we expect Ricardo to consolidate its presence in the U.K. and Europe, and China.

The First Divestment with Ricardo Software

A sign of Ricardo’s new portfolio discipline, the company just divested its small but highly profitable Ricardo Software unit. Ricardo Software had FY22 revenues of GBP 9.3m and an adjusted operating profit margin of 19.4%.

Ricardo Software is an ISV specializing in automotive simulation tools for propulsion and transmission design. Its products include Vectis, Wave, and Wave-RTN. Recently, the unit was repositioned on electric batteries and new fuels modeling.

Ricardo will receive a significant amount for its unit from the buyer, FOG Software, a division of Constellation Software. The price is USD 17.5m (GBP 14.3m) in cash and a further USD 3m in earn-outs. With this move, Ricardo reduces its net debt by a third (GBP 35m at the end of FY22). Ricardo will have more financial flexibility to fund its transformation.

Well done on Ricardo for acting quickly and selling Ricardo Software at a reasonable price. It is nice to see Ricardo taking action after several years of flat growth. We think Ricardo still has a broad portfolio. The portfolio ranges from products to product engineering and infrastructure engineering services. We expect Ricardo to divest its two ‘product’ units: Performance Products and Defense. Performance Products designs and manufactures parts for high-speed cars. Defense provides retrofitting services for the U.S. army’s vehicles. The two businesses are profitable and represent GBP 60m in revenues. The challenge is to find a buyer for those activities in the current macro-conditions.

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