Coronavirus disruption hits Ricardo shares

A 20% slide for consultancy Ricardo tempted investors after today's coronavirus-driven profits warning. 

The highly-regarded British motorsport engineer Ricardo (LSE:RCDO) was forced to hit the brakes today as it warned that coronavirus and other headwinds will leave profits well short of hopes.

Ricardo, which generates some 8% of its revenues in China, said the outbreak had compounded what was already a difficult marketplace for its automotive business in the country.

Shares tumbled 20% as far as 628p, even though half-year results were in line with hopes after a 5% rise in profits to £16 million. The interim dividend was lifted by 4% to 6.24p a share.

Analysts at house broker Liberum noted that a June year-end made it very unlikely that work delayed by coronavirus can be made up in the current half-year, which typically accounts for 60% of annual profits. They cut their 2020 pre-tax profits forecast by 26% and by 20% for the following year.

Liberum also said that travel restrictions in China made it difficult to win new work or to work on existing consulting projects. The broker added: “There is also a lot of uncertainty over the timing of the delayed orders being resumed, and any bounce back in work currently not being tendered.”

Based on its lowered estimates and an updated 2021 price/earnings multiple of 14 times, Liberum's price target has been reduced from 900p to 720p. Shares later recovered to stand at 690p, which was a 9% decline on the opening bell.

While the company is best known for partnering with the likes of McLaren and Bugatti to deliver competition-ready transmissions systems, the bulk of its work is the design and deployment of engineering solutions in sectors including rail, automotive, and defence.

Today's results showed a particularly strong performance in the energy and environment division, with order intake up 22% and revenues 13% higher at £23.6 million. 

The operation employs 550 scientists, economists, consultants and support staff across a range of “green” disciplines, including electricity asset management, carbon and climate policy, resource efficiency, air quality and greenhouse gas management.

Ricardo also serves the rail market with technical advice and has an independent certification division that performs accredited rail assurance services. 

The automotive and industrials segment accounted for 31% of revenues in the half year, with emissions targets set to provide a longer term pipeline of opportunities.

In the meantime, however, its revenues fell 12% to £59 million and operating profits dropped 30% to £5.2 million due to the economic uncertainty impacting global vehicle production.

The motorsports-based Performance Products division, which has sites in Shoreham-by-Sea and Leamington Spa, saw modest declines in order intake and profits due to the phasing of engine and transmission programmes.

Ricardo traces its history back to 1915, when its founder, Sir Harry Ricardo, designed the Mark V tank engine. Its unique selling point was lower emissions, given the need not to give away tank positions on the battlefield.