With roots in the engineering world Porvair (PRV:AIM) has emerged as quite the expert in the filtration process. It has earned a reputation for reliability and is well-placed to withstand the economic knocks of the future.

The company is active in various different parts of the market. For example, it provides filters used in aluminium casting and super alloy manufacturing.

Its filters are also used in aviation fuel and cooling supply systems, energy industry gasification equipment (turning fossil fuel or biomass into gas). It also has a laboratory analysis arm which is involved in areas like testing for chemicals in water supply systems.

Porvair’s filters are vital components for the smooth running of some very expensive capital equipment. For example, a temporary shutdown of an aluminium smelting works or the grounding of planes because they do not have the right filters would cost operators millions of pounds in lost earnings.

Its filters are designed for systems that are often patent protected and bespoke. This leads to lots of repeat business on long lifecycle kit, about 80% of recurring sales, the company has said. This means income tends to be recurring and predictable, while also making it an expensive and time-consuming process for a customer to switch supplier.

Porvair deliberately targets niche markets where demand drivers and strong barriers to entry are high, either through technology development or from increasing regulation.

That doesn’t entirely rule out an element of lumpiness in sales but the company has managed volatility impressively in the past. Between 2014 and 2019 the company has put up 8% average revenue growth per year and 14% in earnings, while order books are said to be healthy with order intake strong in the third quarter.

Nevertheless, this remains something for investors to watch, as is expansion. Porvair is fairly new in China where it now runs two sites. Part of the challenge is moving the Chinese aluminium industry (the world’s largest) from cost-conscious quantity to quality. Embracing better filtration performance should be a boon for Porvair, although overseas firms have failed in China before.

Dividends are small with a mere 0.9% yield but this remains a growing business and payouts are increasing in the mid-to-high single digits.

Investors should note that the stock trades on a premium rating of 23.9 times forecast earnings for the next 12 months. However, that is justified by good earnings visibility, defensive characteristics and attractive earnings growth prospects.

Forecasts call for adjusted pre-tax profit of £14.5m in the year to 30 November 2019, rising to £15.6m in 2020 and £17.2m in 2021.

‹ Previous2019-09-26Next ›