A fair wind propels Volution’s shares

Building materials companies may be struggling but Volution (FAN) continues to breeze through.

The ventilation equipment group’s earnings beat expectations as it eked out a slightly higher operating margin (of 21.3 per cent) despite larger input costs and a moribund housebuilding market that provides around a third of its revenue. 

The remaining two-thirds comes from the refurbishment, maintenance and improvement (RMI) market. Although it too has been weak, Volution has outperformed – especially in the UK where it makes around half of its sales. 

Demand was strong from social housing providers, who have been instructed by the government to improve standards to rid homes of damp and mould. The private RMI market also held up well, though. Chief executive Ronnie George said that while people on tight budgets might skimp on cosmetic projects, awareness of the health risks of poor ventilation sparks more immediate action. 

The company also reported much higher levels of cash generation as it unwound inventory levels built up last year to avoid supply chain strains – its cash conversion ratio jumped from 76 per cent to 106 per cent. 

Volution’s shares had slumped by around a quarter since the beginning of June as investors sold off businesses with exposure to housebuilding, but bounced by 13 per cent given the decent results and an outlook predicting better things for the new financial year. Yet they might not be much better – house broker Berenberg forecasts an earnings per share increase of less than 1 per cent.

The shares are priced in line with their five-year average at 15 times earnings, which we think is reasonable for a through-the-cycle investment with a solid track record. Buy.

Last IC view: Buy, 417p, 20 Apr 2023