Spirax Sarco: Challenging Start to the Year Underpinned by Normalization at Watson-Marlow

Wide-moat Spirax Sarco SPX released a four-month trading update, which is tracking in line with management’s and our own expectations. The anticipated unwinding of excess inventories at biopharmaceutical customers (particularly customers involved in the production of coronavirus vaccines) has led to a decline in segmental sales year to date, whereas the group’s other two operating segments continue to significantly outperform global industrial production supported by historically high order books. Nevertheless, we remain confident that the Watson-Marlow segment will return to growth during the second half of the year as order intake is in line with the previous quarter and therefore the next inflection point will be upward once excess stock winds down. Management has kept its full-year guidance provided in March of mid-single-digit organic sales growth (or double-digit growth including acquisitions) unchanged. We reiterate our GBX 11,800 fair value estimate and view shares as marginally undervalued.

While no figures were provided, the decline in the EBIT margin at Watson-Marlow has more than offset margin expansion from the other two operating segments. While the first-half operating margin is likely to be lower than the prior year due to lower volumes at Watson-Marlow and thus negative operating leverage, we expect a strong recovery in the second half of the year, which will likely see the full-year operating profit margin largely in line with the previous year. The outlook for the group remains positive, which will be further supported by revenue investments in its recent acquisitions.