Volution (FAN) 370p

Loss to date: 4.5%

We made the argument in July that ventilation products manufacturer Volution (FAN) warranted a valuation in line with other high-quality industrial names, saying to buy at 387.6p.

Volution makes everything from air ducts, extractor fans and heat exchangers and coming out of the pandemic the regulatory drivers behind air quality have really stepped up.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

In difficult markets and amid concern about its construction end-markets the shares drifted lower but then publication of full-year results on 5 October rewarded our faith in the company and help revive the shares.

Revenue for the year to 31 July increased 6.6% to £328 million, which was slightly above consensus forecasts of £326 million. Organic growth contributed 4.6% with the balance coming from two acquisitions made in the year and one completed in the prior year.

Despite inflationary headwinds the company delivered 6.8% growth in pre-tax profit to £65.1 million, around 5% higher than the market expected.

Operating margins increased slightly driven by ‘good price discipline, robust cost control and good factory efficiency’.

The business generated strong operating cash, up 50% to £75.7 million leaving the group with net debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) of 0.8 times after spending £30 million on acquisitions.

The proposed dividend for the year increased by 9.6% to 8p per share reflecting strong performance and confidence in the year ahead.

Berenberg analyst Robert Chantry says: ‘As with the rest of the European building products space, end construction markets remain subdued. However, we feel the backdrop of regulatory drivers, strong service and broad product availability should help Volution avoid the worst and take market share.’

WHAT SHOULD INVESTORS DO NOW?

The company is successfully navigating a difficult backdrop and we still see scope for a big re-rating from the current 14 times forecast earnings as the market recognises the business for the regulatory-driven winner it is. Keep buying the shares.

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