Advertisement

This high quality engineering firm will filter profits to investors

Porvair, a maker of high-tech filtration systems, is an excellent long-term pick for your investment portfolio.

There is a select group of high-quality British engineering companies with leading positions in their market niches that make excellent long-term holdings for your portfolio. These include Halma, Rotork and Spirax Sarco. 

Here, we add another: Porvair (LSE: PRV), a member of the FTSE Small Cap index with a market value of £340m. Porvair makes filters – bespoke high-tech filtration systems that, for example, extract impurities from molten metals. 

Advertisement - Article continues below

Porvair’s filters are usually a modest part of the overall cost of process equipment for its clients. But they are crucial for quality and reliability so these features are more important than price.

A specialist in three fields

Porvair has three divisions contributing to its 2019 turnover of £145m: aerospace and industrial (45%); laboratory and environmental (28%); and molten metals (27%). 

Aerospace and industrial makes filtration equipment for aerospace, energy and other industries; top clients include Airbus, Boeing and Rolls-Royce. In 2018 it introduced new products for the US nuclear industry. The second division supplies analytical instruments and consumables (such as reagents) for laboratory and environmental applications, notably water-quality assessment. Molten metals produces specialist filters for the filtration and purification of molten aluminium, ductile iron and nickel-cobalt alloys. 

Advertisement
Advertisement - Article continues below

Porvair’s markets are highly regulated, with aerospace components requiring official accreditation, laboratory instruments needing approval and metal melt quality governed by extensive qualification requirements. The group is also geographically diversified. The Americas comprise around half of overall sales, Europe 26% (the UK accounts for two-fifths), Asia 23% and Africa 1%. 

Five key bullish factors

Porvair has five characteristics that make it an attractive investment. First, it is shielded from competition. It boasts patents on products stemming from research and development (R&D); plus, it makes products specially designed for distinct applications which, in regulated industries such as aerospace or nuclear, require approval by regulators – so it is unlikely that one of Porvair’s products could be replaced by a competitor’s without a protracted approval process. Moreover, production contracts for specific customer applications usually last for seven to ten years so such revenue is secure for long periods. 

Advertisement - Article continues below

Porvair’s second major advantage is that filters are consumables, which must be replaced as part of planned maintenance cycles. That is why some 80% of revenue is recurring, giving the company a secure revenue stream. 

Third, the global market for Porvair’s products is expanding healthily. It is forecast to grow at around 5% per year. Fourth, return on invested capital (ROIC), a key gauge of profitability, is high. In 2019 it reached 14%, down slightly from 15% in 2018 because of an acquisition. 

Finally, the company is cash generative with a strong balance sheet showing net cash of £4m at the end 2019, providing the scope to make further acquisitions should attractive opportunities become available. And that was after investing £14.1m in capital expenditure and acquisitions during the year.

Advertisement
Advertisement - Article continues below

Porvair’s growth comes both from internal innovation and from bolt-on acquisitions. R&D was £4.1m for 2018 (3.2% of sales – quite high for an engineering business) and approximately one third of products were patented. Over the last six years the company has spent £56m on investment and acquisitions. Recent purchases include Royal Dahlman of the Netherlands (a specialist in petrochemical filtration) and Keystone Filter (food and drinking water).

A reasonably priced sustainable grower 

Porvair (LSE: PRV)
Investment measure  Investment ratio
Market value £340mP/e (2021)24.4
Share price 708pDebt/cashNet cash £4m
Results 20182019Change
Turnover £128.8m£144.9m+12.5%
Pre-tax profit £12m£14m+16.7%
Earnings per share 22.1p23.6p+6.8%
Dividend per share 4.6p4.9p+6.5%

Porvair’s laboratory and environmental division designs and manufactures both analytical instruments and the consumables that go with them for use in environmental and bioscience laboratories. 

Advertisement - Article continues below

There is a particular emphasis on water analysis and on sample preparation equipment. This division has facilities in the US, UK, Netherlands and Germany. Designing instruments and the consumables suitable for them means that customers normally buy Porvair’s consumables, which are approved along with the instruments. The emphasis on both emissions reduction and water analysis gives Porvair an environmental, social and governance (ESG) flavour, making it attractive for managers of ESG funds to add to their portfolios. 

The main risk for investors is the irregular nature of large contract wins: revenue and profits could rise strongly one year because of several contract wins but these might not be repeated in the next year, leading to a slowdown. However, this would probably be followed by further growth when the next large contracts are won. For example, in the first half (H1) of 2019, aerospace and industrial won several contracts to give a 48% increase (+£10.4m) in revenue over H1 2018.

Porvair’s last five years of results show steady growth of revenue with 2019 up 39% compared with 2014 and pre-tax profit up 66%. Porvair has in the past exceeded brokers’ forecasts and, in its update of 5 December, the company said its full-year results would be slightly ahead of expectations. The preliminary results released on 3 February showed revenue up 13%, pre-tax profit up 17% and earnings per share up 7% over 2018. The company says 2020 has “started well”. The 2021 p/e is 24.4 – reasonable for a stock of Porvair’s quality and record of sustainable profitable growth. 

Advertisement
Advertisement

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020