Porvair trades at an 18% discount

Porvair (PRV), in keeping with many other industrial groups, has had to contend with a period in which aggregate demand in the economy has been stifled by the rising cost of capital. Yet, if nothing else, the past couple of years suggest that demand for the industrial filtration specialist’s products and expertise is relatively inelastic. That’s because the group’s technologies are embedded within many production processes, so cyclical levers are unlikely to have a disproportionate impact on sales. Indeed, the group notes that compound annual growth rates for revenue and adjusted earnings come in at 6 and 10 per cent respectively over the past 10 years.

That said, the group chief executive, Ben Stocks, does highlight some variance in the group’s end markets in the first half of FY2024, indicating that strength in the aerospace and petrochemical markets offset weakness in industrial and laboratory consumables. Ultimately, “product use and replacement is mandated by regulation, quality accreditation or a maintenance cycle”, which goes someway towards explaining why performance hasn’t been unduly affected by external macroeconomic factors, although demand will wax and wane due to periodic de-stocking in some markets – the group’s laboratory markets provided a case in point at the half-year mark.

The group also targets markets with long-term growth potential and/or those where “product use is mandated, and replacement demand is regular”. So, although the general economic environment hasn’t been overly favourable, the steady increase in environmental regulations governing industrial production continues to support the order book.

Financial performance was mixed through to the end of May. Statutory figures compared unfavourably with the 2023 half-year, but adjusted operating profit edged up by 2 per cent to £12.5mn. Revenues were down by 3 per cent once the impact of M&A activity is stripped out. Margins were constrained by the de-stocking issues in the group’s laboratory markets, and foreign exchange translations trimmed adjusted profits by £0.4mn. Net cash contracted due to £12.7mn given over to acquisitions and capex, the benefits of which will accrue through the remainder of the year.

Trading patterns are likely to be consistent with the first half, although the second half will benefit from the shipping of several larger petrochemical orders. The forward rating of 18 times consensus earnings doesn’t scream value but the 18 per cent discount to the target price suggests that there is still potential low-risk upside on offer. Buy.

Last IC view: Buy, 670p, 5 Feb 2024