Companies: PRV   

Porvair has twin appeal for investors. On one hand, its core and growing filtration business delivers good cash generation, profits and dividends. On the other, it offers a higher-risk play on a blue-sky clean energy research and development project through an advanced materials division.

The main, profitable business is centred on its ‘microporous’ materials expertise. Porvair makes specialist filtration and separation equipment for the aerospace, aluminium and nuclear clean-up industries, ‘where product lifecycles are long and technical specifications are challenging’, and where the need for filtration product performance is ‘paramount’.

For instance, to the aerospace industry the group supplies filtration components and assemblies for contamination control in hydraulic, fuel, lubrication and air systems. As the group’s marketing machine is keen to point out, ‘Porvair's filters protect vital sub-systems such as flight controls, fuel management, thrust reversers, braking and steering in aircraft, helicopters, military vehicles and spacecraft’.

The products are mission critical and according to chief executive Ben Stocks, ‘price isn’t the main issue for our clients, but performance certainly is. And what’s more, our filters are consumable and replaced every one to five years, which equates to good earnings visibility and a nice steady business’.

Financials for the year to November demonstrated the robust nature of the core business, despite an earnings drag from the advanced materials division. At the pre-tax line, profits sparked up 12 per cent to £3.1 million, ahead of the £2.9 million forecast by the market, on sales lifted three per cent to £46.2 million. Earnings soared 40 per cent higher to 5.2p, aided by a better than expected interest bill, and Stocks declared a final dividend of 1.1p. At the year-end, borrowings stood at a reduced £8.4 million, with interest cover remaining comfortable at six times.

The robust outcome reflected an excellent year for the microfiltration division, driven by strong sales within aviation. Operating profits improved by 14 per cent to £5.5 million on £26.4 million sales, and account wins boosting revenues included a programme for a filter system for Airbus, and a $1 million (£507,000) commercial aircraft filter retrofit programme. Stocks concedes the weaker US dollar could provide a short-term ‘headwind’, though the recent acquisition of the profitable, Virginia-based Omni, should help mitigate currency weakness and immediately enhance earnings.

Metals filtration suffered a challenging start to the year, although a round of cost cutting and the passing on of ‘input costs’ came through in a return to form in the second half, with the division returning to profitability and operating margins recovering to normal levels.

The results included £1.3 million of research and development losses from advanced materials. Says Stocks, ‘Yes, this arm is loss making, but you have to consider that in a full year our core business made 8.3p of earnings, but advanced materials took 3.1p of earnings away from that, dragging earnings back to 5.2p.’

Stocks is adamant, however, that the pace of development is quickening in advanced materials, which has a portfolio of clean energy projects ranging from filters that clean gasified coal and biomass processes, to fuel cell components and plates that improve gas combustion efficiency. Any one of these could provide future upside, although management efforts have focused on the two most promising development projects.

The first is diesel exhaust substrates, where Porvair is working with diesel engine maker Deutz and several exhaust specialists. The second is the fuel cell industry, where ‘great strides’ are being made in bipolar plate development. Indeed, trials of the group’s low-cost bipolar plate finished successfully in the early part of the year. Orders have been received and plates are now being shipped regularly, though sales remain modest for now.

‘We’ve had five years of research and development spend and we’re beginning to see light at the end of tunnel,’ says Stocks. ‘Our efforts are now changing from development to early commercialisation.’ The scale of all this investment should start to reduce this year as projects come to fruition. Stocks insists Porvair has ‘reached the point where its current business and future prospects are attractively set’.

This year, analysts are looking for a profits improvement to £3.3 million and a rise in earnings from 5.2p to 5.7p. For 2008, profits of £4.6 million and 7.5p of earnings look achievable, representing growth of 40 per cent and 32 per cent respectively. Forward earnings multiples of 24.3 and 18.5 at first glance do not appear cheap, but investors should remember that ‘true’ earnings are masked by R&D losses. Strip out advanced materials from the 2006 numbers and the shares trade on a historic p/e of 16.6.

Porvair	LSE	£24.4m	58.00p	-0.50p
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