Porvair – recovery due over the next year

Mark Watson-Mitchell anticipates improving fortunes for this specialist filtration and environmental technology company. 

Two weeks ago, this Kings Lynn, Norfolk based group announced its trading update for the nine months to end-August.

They covered the ghastly Covid-19 affected period and despite showing a fall-off in sales, just 2.5% down, it certainly showed some resilience to the virus.

Porvair (LON:PRV) is a specialist filtration and environmental technology company engaged in the development, design and manufacture of filtration and separation equipment.

It operates through three divisions: Aerospace and Industrial; Laboratory; and Metal Melt Quality.

The Aerospace and Industrial Division designs and manufactures a broad range of specialist filtration equipment for application in aerospace, energy, bioscience, water and industrial applications.

This division, which has operations in the UK, the US and in India, serves the petrochemical, general industrial, energy and aerospace markets. Its particular growth drivers are energy demand, air travel and emissions.

The Laboratory Division designs and manufactures instruments and consumables for use in environmental and bioscience laboratories with a particular focus on water analysis instruments and sample preparation equipment.

This division has operations in the US, Germany, the Netherlands and the UK. Its main markets are water laboratories, bioscience filtration, and chromatography.

Its growth drivers centre around clean water, bioscience research and drug discovery.

The Metal Melt Quality Division serves the market for the filtration and handling of molten metal.

This division, which has operations in the US and China, is involved in the design and manufacture of porous ceramic filters for the filtration of molten metals. It is the world leader in the filtration of cast house aluminium.

It serves the global aluminium market, as well as the US foundry and super alloys markets. Its growth drivers are in aluminium light weighting, car production, agricultural and turbines.

The group, which has some 930 employees globally, operates through plants located in the US, the UK, the Netherlands, Germany and China.

A group sales breakdown for last year showed the Aerospace and Industrial side generating 44.6% of the revenues, Laboratory 28.5%, and Metal Melt Quality 26.9%.

Geographically 52% of sales were sourced in the US, 34.5% in the UK, 9.3% in Europe and the 4.1% balance in Asia.

This year those percentages will differ considerably.

The recent trading update stated that order books are showing year-on-year declines in the Aerospace and Industrial and the Metal Melt Quality divisions, where costs have been cut commensurately.

However, it is apparent that orders in the Laboratory division for the balance of 2020 and into 2021 are sharply higher.

Despite the two divisions easing back on order book intakes, the group remains profitable and cash generative.

In its effort to strengthen business activity the management is concentrating upon investing in group skills, in its manufacturing capability, whilst attending to margin enhancement and developing new product projects.

It is developing a range of products, including products for the manufacture of turbine blades, solar panel manufacture and energy storage.

There are 46.1m shares in issue with two major private holders, Giorgio Girondi (16.8%) and the Hoegh Family (9.42%).

Large professional holders include Bank Julius Bar (16.8%), Liontrust Investments (8.63%), Standard Life Investments (7.31%), SEB Investment Management (7.16%), Vind Equity AS (6.72%), Impax Asset Management (5.88%), Financiere de l’Echiquier (4.02%), and Hargreaves Lansdown Asset Management (2.31%).

Estimates in the market suggest that revenues for the year to the end of next month will ease back from £145m to £133.5m, with pre-tax profits down at £11.67m (£14.79m). That would drop earnings down to 19.87p per share (25.3p) but would still comfortably cover a 4.83p per share dividend.

The next trading update will be early in December.

The year to end-November 2021 should see sales pick up to £140m, profits up to £14m and earnings of 24p covering a 5p dividend.

In the last year the group’s shares have been up to 777p and as low as 446p.

At the current 510p this quality company may look overvalued, but I see it differently. Assuming recovery in 2021, I will now set a 600p target price.