Investment – organic and inorganic – is a key theme of Volution’s H117 results, contributing to healthy y-o-y growth. Volution has the financial capacity to continue this strategy and, in more mixed market conditions, acquisitions may be more significant drivers for premium earnings growth.
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Volution Group |
Investing for growth
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Construction & materials |
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24 March 2017 |
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Investment – organic and inorganic – is a key theme of Volution’s H117 results, contributing to healthy y-o-y growth. Volution has the financial capacity to continue this strategy and, in more mixed market conditions, acquisitions may be more significant drivers for premium earnings growth.
Underlying growth boosted by acquisitions and FX
H117 headline growth rates were strongly ahead in all reported Ventilation Group categories and acquisitions largely boosted UK progress. L-f-ls (ex-favourable acquisition and FX effects) were more of a mixed bag; we estimate that European revenue was + c 5.2% (with both subregions ahead) and the UK was +1.4% (with positive exports and residential new build sectors, partly offset by weakness in residential RMI, with commercial flat). Underlying profitability is more difficult to read; there was some gross margin improvement (at least partly due to US$ transactional hedging last year), but there has also been P&L investment in sales resource. Acquisitions (Welair, Diffusion, NVA – all prior year, and Breathing Buildings – December 2016) chipped in c £12m of c £78m revenue for the Ventilation Group and all are understood to be trading ahead of pre-acquisition levels, which should feed into l-f-ls in due course. Torin-Sifan is in a product transition phase. Volution ended H117 with c £40m net debt (1.1x trailing EBITDA), with free cash flow funding acquisition spend of £11.6m in the period.
Clear acquisition and group integration strategy
Management has expounded a clear acquisition strategy, and has successfully identified and landed some of its targets to date. As well as integrating individual acquisitions, we like the fact that broader steps are being taken, including implementing a new ERP system (almost complete) and consolidating some UK manufacturing operations. The latter move is expected to cost c £1.75m (with a mid-2018 completion date), entails minimal capex and, with no net operating cost impact, will increase floor space of the operations to be combined by c 25%. Together, these actions provide an enhanced platform for further growth.
Valuation: Anticipating growth
Since June last year, Volution’s share price has performed broadly in line with, but slightly ahead of the FTSE All-Share index and is up c 9% ytd. In our view, the rating is probably anticipating further use of the company’s financial capacity to make earnings-enhancing acquisitions. Ahead of this, Volution is trading on a low-teens P/E multiple (and a PEG in excess of 2x), with a comparatively low yield for the subsector, but with scope to grow it reasonably quickly in most scenarios.
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Consensus estimates
Source: Bloomberg. Note: Company-defined adjusted basis. |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Disclaimer
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Disclaimer
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IG Design has had a very good second half trading and has issued a year-end update indicating that numbers will exceed market estimates. We have lifted our FY17 and FY18 numbers by 8-10% at the pre-tax and EPS levels, following an 11% uplift to earnings with the interims. Particularly notable is the comment on strong cash flow, with the group reaching its target of average leverage less than 2.5x EBITDA two years ahead of plan. With the earnings and cash flow momentum, strong balance sheet and progressive dividend, there is good potential for further share price upside.