Manufacturers need new, smart materials to create more advanced products. From more efficient solar panels to increasingly complex microchips, cleaner transport to medical diagnostic equipment, materials engineer Morgan Advanced Materials (MGAM) is right at the bleeding edge.

Its roots go back to 1856 where it developed advanced melting pots, or crucibles, used in the metal smelting industry, a market where it still supplies industry leading products and technology.

But it has branched out over the decades making largely unique, high performance ceramic and carbon based products used in healthcare, electronics, oil and gas and more.

The FTSE 250 constituent is emerging from several years of patchy performance that has left the stock trading on a deeply discounted rating. It is now trades on less than 10 times 2020’s forecast earnings with a 4.7% dividend yield more than twice-covered by earnings.

The recovery plan has involved largely self-help measures, such as simplifying the business, stripping out excess cost, streamlining the product portfolio and improving organic growth through better sales processes. This has helped Morgan continue to improve return on capital employed, hitting 17.7% last year, according to Berenberg calculations.

Morgan has also spent the past few years investing heavily in research and development (R&D) which has dragged on profit margins. We believe the benefits are about to start coming through thanks to sales of higher margin proprietary products and a greater focus on those end markets where technical demands are high and solutions need to be increasingly sophisticated.

Its hyper insulating Superwool is a good example, used in power generation, fire protection and even by academics in subatomic experiments.

Analysts believe that even in the face of wider economic challenges Morgan is capable of driving profit margins to new records thanks to productivity improvements, past R&D investment and new product launches.

In the first half of 2019 operating profit margins hit 12.8%, after stripping out amortisation, a 70 basis point improvement. Berenberg estimates this trending up to a record 13.2% by 2021.

A robust balance sheet means Morgan Advanced Materials has the firepower to make bolt-on acquisitions to bolster growth further. Dividends should also start to grow meaningfully again.

The company could be vulnerable to a meaningful cyclical downturn in major industries and economies, although this already looks discounted in the current share price.

But this is also just the sort of technical skills-based business that could be targeted for takeover by a cash-rich overseas buyer using the weak pound to cherry pick great British assets.

‹ Previous2019-08-29Next ›