Volution (FAN) supplies ventilation systems for commercial and residential settings – everything from bathroom extractor fans to whole building ‘mechanical ventilation heat recovery’ systems. Catering to both the new-build and ‘repair, maintenance and improvement’ (RMI) markets, its brands enjoy leading positions across the UK, Continental Europe and Australasia. Demand is driven by two interconnecting factors – a focus on improving indoor air quality and the effort to increase buildings’ energy efficiency. These are supported by rising levels of regulation, including the European Union’s ‘energy performance of buildings’ directive’.
Scope for margin improvement
A key risk to the investment case is cyclical exposure. Reliance on construction activity – particularly housebuilding – means Volution is vulnerable to a downturn. Just over 50 per cent of revenue comes from the UK, and the Brexit and general election-induced slowdown weighed on the six months to 31 January. New-build residential and commercial weakness saw domestic revenue dip 3 per cent to £65m in the first half. However, this was more than offset by Australasian sales almost doubling thanks to the £10m acquisition of residential supplier Ventair. With more efficient manufacturing and upselling of higher-value products pushing the margin up 0.7 percentage points to 18.3 per cent, adjusted operating profit ticked up 9 per cent at constant currencies, to £22m.
The UK business has been most impacted by Covid-19, with revenues in April 70 per cent lower than a year earlier. This had recovered to a 19 per cent shortfall by the end of July and many of Volution’s international markets have rebounded to around pre-pandemic levels. Full-year revenue is guided to be £217m, which would be just a 7 per cent constant currency decline from 2019. While margins have been squeezed in the second half, they are expected to recover next year. Volution is still targeting a 20 per cent margin in the medium term by cutting production costs and further increasing factory efficiency. Margins should also benefit from spending 2.2 per cent of revenue each year on research and development, with higher-value innovations providing a competitive advantage.
Excluding lease liabilities, net debt was £61m at the end of January, down from £75m at the July 2019 year-end. Net debt has dropped further across the second half and Volution expects it to be equivalent to less than 1.6 times adjusted cash profits (Ebitda) by the year-end. Meanwhile, it has a track record of good cash generation – first-half operating cash jumped over a third year on year to £24.5m and it continued to generate cash during lockdown. The balance sheet should therefore support further acquisitions to take advantage of fragmented markets. The justifiable adjustment for amortisation of acquired intangible assets explains much of the historic difference between underlying and reported earnings, although the company has in the past also shown itself not to be shy about treating more run-of-the-mill costs, such as reorganisation charges and director recruitment fees, as exceptional.
|ORD PRICE:||167p||MARKET VALUE:||£331m|
|FORWARD DIVIDEND YIELD:||2.6%||FORWARD PE RATIO:||12|
|NET ASSET VALUE:||87.6p*||NET DEBT:||46%|
|Year to 31 Jul||Turnover (£m)||Pre-tax profit (£m)**||Earnings per share (p)**||Dividend per share (p)|
|*Includes intangible assets of £199m, or 101p a share|
|**Berenberg forecasts, adjusted PTP, EPS figures|