Volution (FAN), which supplies ventilation products, floated on London's main market in June last year. Its progress since then has been impressive, underpinned by the twin pillars of a booming housebuilding industry and tighter regulations governing energy conservation. With neither likely to disappear, Volution has significant growth potential, which it is supplementing with acquisitions.
- Strong demand for new home ventilation systems
- Acquisitions
- Tougher conservation regulations coming in next year
- Significant market share
- Modest dividend
- Vulnerable to currency headwinds
In the year to July, product sales associated with new housing in the UK rose nearly 18 per cent. This helped power organic sales growth 4.5 per cent, measured in constant currencies, while acquisitions added another 7.5 per cent.
Volution's products go far beyond the notion of a piece of plastic whizzing round in a window. Housebuilders need more centralised ventilation systems. This is because it's all well and good insulating a home to make it airtight, but it still needs ventilation, which needs to come from systems that won't waste heat or compromise air quality. The group also produces systems that extract air and capture the heat from it for reuse. Volution's development of this kind of value-added product along with a dominant position in its end markets has helped support profitability, with cash-profit margins comfortably over 20 per cent. Operational efficiencies are expected to drive margins higher still and analysts at Berenberg reckon that every 0.5 per cent increase in margin will lead to a 2.5 per cent rise in EPS.
Demand, meanwhile, which is already on the increase, is set to grow further in 2016 as new homes are required to meet the Zero Carbon Standard. As Volution supplies over a third of the UK's new-build ventilation market, it looks set to benefit significantly.
The group's operations are split into two divisions. The residential ventilation products business operates in the UK, Germany and Scandinavia, and accounted for 85 per cent of first-half turnover. The other division supplies motors, fans and blowers to original equipment makers and operates as Torin-Sifan. Torin-Sifan's sales were down at the half-year stage, mainly as a result of lower sales of spare parts for non-condensing boilers during the mild winter period, while the European business has also been hit by adverse currency movements.
| VOLUTION (FAN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 169p | MARKET VALUE: | £338m | |
| TOUCH: | 165-172p | 12-MONTH HIGH: | 174p | LOW: 126p |
| FORWARD DIVIDEND YIELD: | 2.1% | FORWARD PE RATIO: | 14 | |
| NET ASSET VALUE: | 69p* | NET DEBT: | 23% | |
| Year to 31 Jul | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 89 | -11.8 | na | nil |
| 2013 | 102 | 9.2 | 12.5 | nil |
| 2014 | 121 | 14.0 | 14.9 | nil |
| 2015** | 131 | 27.0 | 10.6 | 3.2 |
| 2016** | 137 | 29.9 | 11.8 | 3.5 |
| % change | +5 | +11 | +11 | +9 |
Normal market size: 2,000 Matched bargain trading Beta: 0.29 *Includes intangible assets of £157m, or 79p a share **Berenberg forecasts, adjusted PTP and EPS | ||||
As with all companies that are dependent on the economic cycle, financial strength is important. Net debt was reduced significantly with the funds raised at float and now stands at about one times cash profit. This meant first-half financing costs dropped from £15m to £1.3m, and Volution is expected to have net cash by 2018.
However, money is also being spent on acquisitions to drive growth in the group's fragmented end market. In April this year, it purchased Brüggemann in Germany, where integration is progressing well, and more recently it completed the acquisition of Ventilair. Strong cash flow also prompted the introduction of a maiden dividend.
