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

Wide-moat Spirax Sarco 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.