Filtration technology supplier Porvair (LON: PRV) had a strong end to its financial year, but it will be difficult to maintain margins this year. Even so, Porvair has exposure to clean technology growth markets that should enable it to increase profit over the coming years.
The relative small profit decline in the year to November 2020 shows the resilience of the business and group profit is much higher than in 2018-2019. There is a wide spread of products, so there is no dependence on one sector. There is also a geographic spread of business, although the US is the biggest market.
In the year to November 2022, revenues improved from £146.3m to £172.6m, while underlying pre-tax profit rose from £14.8m to £19.4m. Prompt price increases to cover higher costs helped to improve profit and supply constraints were managed.
Divisions
The biggest improvement was in the aerospace and industrial division, with aerospace demand getting back to pre-Covid levels. Microelectronics demand was also strong as semiconductor manufacturers invest in increasing capacity, although this is likely to be a short-term cyclical boost.
The laboratory division improved its profit even though the corresponding period had additional Covid-related work. A new water analysis instrument did better than expected.
Metal melt quality division revenues grew slightly faster than the other divisions. This division benefits from the increasing use of aluminium as a replacement for other materials.
Aluminium will increasingly replace steel in electric and hybrid vehicles due to its lighter weight and this quality of aluminium requires filtration by Porvair technology. There is also a move from PET bottles to aluminium cans for drinks because of their recyclability.
The total dividend was increased from 5.3p a share to 5.7p a share. Net cash is £18.3m and that is set to rise to more than £24m at the end of November 2023. That can finance capital investment to improve productivity and fund suitable acquisitions if they can be found.
Peel Hunt forecasts a reduction in underlying operating margin from 11.5% to 10.7% this year. That means that although revenues are set to grow, pre-tax profit could decline to around £18m before starting to grow again.
At 598p, the shares are trading on 19 times prospective earnings. Supply chain problems are easing, and forecasts could prove to be overly cautious but at this point they are sensible.
