Rotork's margin plans deserve higher rating, UBS says as it upgrades

UBS upgraded Rotork to a 'buy' recommendation and hitched the target price to 295p from 255p on the company's plans to return to higher operating margins by 2021, which would support 12% compound annual growth in earnings per share.

After Rotork saw its sales fall 19% organically over 2015-16, with its cost base not scaled back, executive chairman Martin Lamb has set out a medium term plan to return to past 25% margins and mid-upper single digit organic growth, with a new CEO being recruited to lead this.

"Our analysis of the Rotork cost base suggests significant opportunities to lift operating margins. This contrasts with a share price that on our reverse DCF is pricing in no significant margin upside based on consensus revenue forecasts," analysts at the Swiss bank said.

"Even with increased investment in areas such as R&D we see significant scope for cost action driving margin expansion and correlation analysis of the Rotork share price versus business performance since 1965 shows operating margin change as a more important share price driver than sales growth."

Seeing potential higher sales growth as an additional possible kicker, UBS lifted its EPS forecasts by 10% by 2021 to reflect a forecast of 25.7% operating margins.