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The engineering consultancy firm Ricardo finds itself at a crossroads as it navigates a transitioning business model towards greener forms of engineering. Despite some areas of turbulence, there are promising signs of growth and reasons for investor optimism.

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Ricardo’s recent performance presents somewhat of a mixed bag for investors. While the company managed to grow sales by 5% in the six months leading up to December 31 (2023), adjusted operating profit saw a decline of 4%, amounting to £12mn. This dip in profit is primarily attributed to delayed customer orders within Ricardo’s automotive and industrial arm, covering both ‘emerging mobility’ and ‘established mobility’. Both these divisions have reported operating losses and a significantly decreased order intake.

Contrastingly, the firm’s rail, energy & environment, and defence businesses have all shown promising growth in revenue and profit. The order book for these segments stands at an impressive £477mn, marking a 15% year-on-year increase and a record high for the company. The defence division, in particular, has been a standout performer with order intake more than doubling to £114mn.

Transitioning Towards a Greener Future

A pivotal consideration for investors is Ricardo’s transition from its traditional focus to greener forms of engineering. This shift in business model has thus far proven somewhat inconsistent, with restructuring costs and write-downs pushing the company into a pre-tax loss last year. The firm’s recent statutory loss before tax stands at £2.1mn.

Despite these challenges, there are encouraging signs. Management has noted improved sales activity and growth in the automotive and industrial division in the second quarter, and anticipates a return to profit for this arm in the second half of the year. Furthermore, other business segments are demonstrating consistent growth, and the underlying cash conversion is exceptionally strong at 130%.

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The performance of Ricardo in the next six months will be crucial in determining the success of its transition. While the possibility of unexpected hurdles in the automotive and industrial division remains, the company’s diverse portfolio positions it well to withstand short-term turbulence.

Ricardo presents a compelling investment opportunity. Despite a year-to-date (April 2024) share price dip of 12%, the firm’s record order book, robust cash conversion, and the potential rebound of the automotive and industrial division are encouraging indicators for future profitability.