- EPS ahead of consensus
- UK residential activity increases
Shares in Volution (FAN) received a boost midway through December after the ventilation specialist upgraded interim earnings projections. Three months on, and the market gave another thumbs-up as adjusted operating profits increased by 12.9 per cent to £38.6mn on a 130 basis point rise in the underlying margin.
The positive financial performance needs to be set in context against a market backdrop characterised by faltering new-build demand. The general economic malaise has weighed on demand levels from original equipment manufacturers, but mandated support is being provided by tightened environmental regulation and the wellspring of social housing demand. Increased public awareness of the dangers posed by specific issues such as exposure to black mould is also driving activity. So, it’s understandable why organic growth in the UK residential division came in at 19.4 per cent. The prevalence of sustainability targets in the UK and elsewhere should continue to have a positive material impact on trading volumes, although the level of activity could conceivably moderate over time.
Increased exposure to refurbishment work has also fed into top-line growth, along with the positive impact of recent acquisitions. The increase in the operating margin helped to offset the dilutive effect of the acquisitions on the group return on invested capital. A manageable leverage ratio of 0.7 times (ex-lease liabilities) provides optionality on the M&A front, so we might reasonably expect further deals going forward.
Liberum has increased its earnings per share (EPS) estimate to 27p a share, while raising its target price on the stock to 510p (from 470p).
The board confirmed that adjusted EPS for the current financial year is on track to be slightly ahead of consensus. A forward rating of 17 times earnings isn’t exactly bargain-basement territory, but we think the multiple is justified given regulatory tailwinds and the ongoing structural deficit in the UK housing market. Buy.
Last IC view: Buy, 383p, 5 Oct 2023
| VOLUTION (FAN) | ||||
| ORD PRICE: | 449p | MARKET VALUE: | £888mn | |
| TOUCH: | 447-449p | 12-MONTH HIGH: | 456p | LOW: 328p |
| DIVIDEND YIELD: | 1.8% | PE RATIO: | 21 | |
| NET ASSET VALUE: | 119p* | NET DEBT: | 40% | |
| Half-year to 31 Jan | Turnover (£mn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2022 | 162 | 22.6 | 8.60 | 2.50 |
| 2023 | 172 | 29.0 | 11.1 | 2.80 |
| % change | +6 | +28 | +29 | +12 |
| Ex-div: | 28 Mar | |||
| Payment: | 07 May | |||
| *Includes intangibles assets of £257mn, or 130p a share | ||||
