Porvair boosts efficiencies through targeted investments

Porvair (PRV) creates filters that are used in industrial and manufacturing applications. Its three biggest markets are aerospace, laboratories and metal melting. The latest full-year figures detail 18 per cent revenue growth and improving profitability. But with growing macroeconomic concerns, and a possible fall-away in industrial activity, the outlook for FY2023 is far from certain.

The strongest top-line growth came in the metal melting business. Revenue there grew 21 per cent to £45.2mn with more than 90bn cans produced from aluminium filtered by Porvair in 2022. The aerospace and industrial segment saw the fastest rise in profit thanks to the bounce-back in travel demand. Revenue from the division rose 16 per cent to £64.7mn, while adjusted operating profit increased by 64 per cent. Aerospace performance was helped by the ability to efficiently push through price rises to customers, which more than offset an accompanying increase in costs. This pricing power is good news for investors. On top of this, Porvair has been bringing down its own costs through capital investment.

Group operating profit margin improved from 10.8 per cent to 11.5 per cent due to “consistent investment in productivity over the last five years”. It has been automating more of its procedures, and last year investment continued with capital expenditure rising from £3.2mn to £4.9mn.

This year, management sees “reasons for caution” due to supply chain dislocation and wider economic concerns. Industrial spending is usually cyclical, so the group is more exposed than some businesses. However, 50 per cent of group revenue comes from the US market, where manufacturers are increasingly looking to boost efficiencies. 

Economic concerns are weighing on analyst expectations, with FactSet consensus forecasting that earnings per share will drop 10 per cent in FY2023 to 37p, before rising slightly in the following year. This gives a forward price/earnings ratio of 20, which looks slightly ambitious given the uncertainty ahead. House broker Peel Hunt points to the net cash on the balance sheet, record order book at the end of the year, and improving productivity as reasons for optimism. However, global supply chains and de-globalisation are outside of management’s control. We stick with hold.  

Last IC View: Hold, 594p, 4 Jul 2022