Specialist UK engineers find sweet spot as pandemic boosts valuations


In a spa town in the Cotswolds lies Spirax Sarco. The UK engineer makes the special pumps and tubes essential to Covid-19 vaccine production, the steam systems that cook Heinz’s baked beans and the electric thermal heaters to safely launch Nasa’s space shuttles.

But its profile barely reaches beyond its customers, despite its near £11bn value.

“Although we’re a FTSE 100, we’re not a household name because we operate in very specific niches,” said chief executive Nick Anderson.

Spirax Sarco is one of a handful of sophisticated UK engineers focused on hidden corners of modern industry whose valuations surged before and during the pandemic. Many have eclipsed more generalised and cyclical London-listed manufacturers, such as IMI, Weir Group and Smiths Group, whose valuation has been dragged down by the medical division it has been struggling to separate and sell since 2018.

Shares in Spirax Sarco have risen 74 per cent from pre-pandemic levels, even after more than tripling over the previous five years.

Its peers — Halma, Spectris and Renishaw — have followed a similar pattern and the trend stretches beyond the UK. Valuations of specialist industrial groups including Swiss actuator producer Belimo, Japanese sensor maker Keyence and Ohio-based lab equipment manufacturer Mettler-Toledo have risen far above those of more broad-based conglomerate rivals.

Spirax Sarco’s factory in Cheltenham
Spirax Sarco’s factory in Cheltenham. The company is one of a handful of sophisticated UK engineers focused on hidden corners of modern industry © Andrew Fox/FT

Bankers are now pointing to an unprecedented divide between these specialist companies and the more commoditised companies struggling to consistently increase profits, partly due to margin pressure from greater competition in low-cost regions such as China.

“The premium that used to be 10 or 20 per cent is at 50 per cent or more between the high-quality folks and average ones in industrial tech. We’re talking about two very different worlds,” said one industrial banker.

One factor behind the allure of the niche UK groups to investors is that their highly specialised products are used in industrial processes in some of the pandemic’s most buoyant markets, such as pharmaceuticals and food and beverage. With customers seeing their products as essential, they have been less vulnerable to cost-cutting initiatives.

Anthony Plom, an analyst at Berenberg, said investors sought out the resilient high-tech engineers during the “services downturn” of the pandemic. “They’ve almost been treated like quasi-cash over the past 12 months as they won’t let you down,” he said.

Julian Fosh, fund manager at Liontrust Asset Management, a large investor in specialist UK manufacturers, said the companies were adept at reinvesting profits and ensuring high cash returns on invested capital — a measure of a company’s efficiency at generating profits.

“We buy and hold. It’s better to have a quality business and pay a better price for it,” said Fosh.

Other manufacturers have been more exposed in the pandemic. Operating profits at heat treatment supplier Bodycote, for example, were almost wiped out last year due to its high exposure to the automotive and aerospace sectors. Vesuvius, a molten metal flow engineer, was hit by the downturn in steel production.

Line chart of Price to earnings, forward blended 12-months (x) showing Premium widens for high-quality manufacturers

Fears have been rising, however, that the successful specialist firms are starting to look overvalued.

Equipment maker Renishaw failed to find a buyer after a recent search, as its value rose from £3bn before the pandemic to as high as £5bn.

The average ratio between enterprise value and forecasted earnings before interest, taxes, depreciation and amortisation has hit about 34 times at Spirax Sarco, Halma, Spectris, Renishaw and Rotork. A basket of 11 other London-listed engineers trade at 20 times, according to Bloomberg data.

Investors and analysts dismiss the notion of a bubble, defending the specialist engineers’ premium as justified given the expectation of profit upgrades following this year’s rebound in industrial production.

Andrew Williams, chief executive of Halma, an Amersham-based company that manages 45 health and safety businesses, said the group was operating in “markets with long-term structural growth drivers”.

The £10.4bn valued group has doubled its earnings in five years and increased its dividend by 5 per cent or more for 42 years by buying up smaller companies, often privately held, and expanding them.

Spirax Sarco’s factory in Cheltenham
Investors and analysts dismiss the notion of a bubble, defending the specialist engineers’ premium as justified © Andrew Fox/FT

“We have a 20-year mindset when it comes to an acquisition . . . The value we bring is maturing that business into a global company,” said Williams.

While some makers such as Spectris are venturing into software, Scott Cagehin, an analyst at Investec, said groups such as Spirax Sarco and Halma that help customers reduce water and energy use, are also becoming more attractive as “ESG plays” for investors. Exposure to oil and gas has weighed others down, such as actuator specialist Rotork.

However, the market looks set to become tougher, with Beijing signalling last week that it intended to develop 10,000 “little giants” in niche manufacturing sectors, increasing the pressure on the UK specialist groups, which derive the vast majority of their revenues overseas.


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