Spirax-Sarco Earnings: Lower Demand at Watson-Marlow to Persist in 2023

Destocking from Watson-Marlow’s biopharma customers, who are still working their way through excess inventories bought during the pandemic, had a significant effect on wide-moat Spirax-Sarco’s SPX first-half results and is expected to persist during the full year. Organic revenue grew 2% during first-half 2023, which, if we exclude biopharma customers, would have been 11%, highlighting that the remainder of the group remains structurally strong, growing significantly ahead global industrial production. We had anticipated destocking to be mostly complete by now and thus lower our 2023 organic revenue growth to 3.2% from 5.4% and our EBIT margin to 22.2% from 23.5%. Nevertheless, the group’s longer-term outlook remains firmly intact as does our GBX 11,800 fair value estimate. Shares are slightly undervalued.

Expectations that destocking will persist have led management to lower its organic revenue growth guidance to between 0% and 4% (from mid-single-digit growth) and a decline in its operating profit margin of between 100 and 200 basis points (from a slight progression). A combination of price and volume growth in steam specialties supported organic revenue and operating profit growth of 15% and 25%, respectively. The electrical thermal solutions segment delivered 7% organic revenue growth, despite lower demand from semiconductor customers that account for 18% of the segment’s sales. We expect Spirax-Sarco will comfortably overcome short-term weakness and continue to grow ahead of global industrial production, driven by the mission-critical nature and short payback period its products provide customers, as well as secular growth from end markets.

The board raised its interim dividend by 8% to 46.0 pence, a firm indicator that first-half results are a temporary blip.