Companies with regulatory drivers underpinning their business should be highly prized, particularly in the current economic environment. A recent pullback in the share price of ventilation products maker Volution (FAN) has created an opportunity to invest in just such an outfit.

Volution bears resemblance to some of the UK’s highest quality industrial names and Shore Capital analyst Graeme Kyle suggests there is some conservativism baked into consensus forecasts. The shares trade on an undemanding 15.2 times next 12 months’ earnings estimates with a 2% dividend yield.

The company’s quality is reflected in an adjusted operating margin of 21%, achieved despite inflationary pressures, and comparable with health, safety and environmental electronics equipment designer Halma (HLMA) which trades on a valuation of 27 times earnings.

Volution manufactures items such as extractor fans and air ducts and a big driver of investor interest in the company and its revenue in recent years has been Covid. The pandemic has led to increased focus and stricter rules around air flow and quality as countries have reacted to what was an airborne, respiratory disease.

This trend was reflected in a strong year-end trading update covering the 12 months to 31 July 2023, with robust demand in the UK repair, maintenance and improvement market supported by investment to improve indoor air quality in local authority and housing association properties.

Energy efficiency is another driver and thanks to a mix of organic and acquisitive growth, Volution has become a larger and more geographically diversified business in recent years.

In the six months to 31 January 2023 the company generated 45% of its revenue from the UK, 40% from continental Europe and 15% from Australasia. A net debt to earnings ratio of around one-times implies there is headroom for further deals to augment growth.

M&A expenditure in 2023 so far totals £39 million, its most active year on this metric apart from 2017 when it spent £44 million.

As Berenberg analyst Robert Chantry observes Volution has not just been a beneficiary of external factors, it has also helped itself. ‘We feel the backdrop of regulatory drivers has been helping, but strong market service and product availability have also helped Volution gain share,’ he says.

Further product innovation should help bolster its competitive position and we see big potential for the business and its share price.

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