- Baillie Gifford's Iain McCombie invests in cash-generative company Volution
- The company is benefiting from an increased awareness of the health impacts of indoor air quality
- Volution is pursuing ambitious sustainability targets
Iain McCombie, co-manager of Baillie Gifford UK Growth Fund (BGUK), explains why he invests in Volution (FAN), a supplier of ventilation products.
"Growth companies come in all shapes and sizes and Volution is one that we have been happy to tuck away in our UK equity portfolios. The company is a manufacturer of ventilation products which range from simple extractor fans to more complex ventilation systems in both the residential and commercial markets.
"About half its sales are in the UK, with the balance in Europe and Australasia. These markets might seem unexciting but operating margins are surprisingly good at about 20 per cent, reflecting Volution’s leading positions in most of its markets. The business is highly cash-generative which has allowed chief executive officer Ronnie George, who has led it since 2012, to reinvest the cash in a series of disciplined bolt-on acquisitions in Europe and Australasia, where the markets are fragmented and ripe for consolidation. It also boosts Volution’s growth rate.
"This investment story has been clear since it floated in 2014, but it appeared to fly under the radar for many investors. However, perceptions appear to be changing. While the Covid pandemic hurt the business in the UK in particular, the successful diversification into Europe, and especially New Zealand and Australia, helped mitigate the downside, so the business remained profitable and cash-generative. Volution is now seeing a decent recovery in sales and the target to improve margins has been achieved six months ahead of schedule.
"There is also more appreciation of Volution’s exposure to a number of interesting environmental trends. As we are becoming more environmentally conscious, there is a growing awareness of the impact on our health of indoor air quality. Volution’s products help address these challenges. This trend is reinforced by governments increasing legislation around cutting emissions, and encouraging greater energy efficiency in Volution’s key markets of building and construction. This is a highly promising tailwind that could boost organic growth for years to come.
"I like that the company is not resting on its laurels. It has disclosed targets to increase the amount of recycled plastic in its products and the percentage of sales revenue coming from low-carbon products. Intriguingly, Volution has now signed a sustainable credit facility with its banks whereby it will earn a discount on the rate of interest if it meets the targets set for these two areas of improvement. Such savings will be reinvested in sustainability initiatives. This strikes me as a great example of a company seeking to do the right thing."
