Credit Suisse downgraded actuator manufacturer and flow control company Rotork to 'underperform' from 'neutral' on valuation grounds.
The bank, which left its 300p price target unchanged, pointed out that the stock is now close to pricing in its blue sky valuation, in which Rotork grows organically at 10% in 2019/20.

"In terms of fundamentals we see risk that 2018 margins underwhelm and judging by the +10% share price reaction on the Q118 IMS the management comments around unfavourable divisional mix in orders' and 'investing much of the profit contribution' appear to have been largely ignored.

"A comparison versus consensus is difficult currently as many have not updated since the Q118 IMS (we are now 6% ahead on EBIT this year) but we would focus more on what is priced in with the free cash flow yield now having fallen to 3.5% in 2019E versus the sector average of 5.3%."

CS said margin expansion may be back-end loaded. It noted that Rotork is aiming for a return to 25% EBITA margins in the mid-term, but pointed out that it's currently in investment phase with a £15m impact this year.

"We would expect a return to more normal operational leverage (40%) in 2019 but the sharper step-up in margins to come in the latter parts of the 3-5 year programme (i.e. 2020 onwards). We also see limited room for error in the current valuation if divisional mix and higher than planned investments resulted in 2018E margins being flat (versus our 70 basis points margin expansion) which is a risk."

At 1520 BST, the shares were flat at 354.60p.

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