Interactive Investor

Record-breaking Porvair at a discount

26th January 2015 12:49

Lee Wild from interactive investor

Porvair broke records in 2014. The specialist filtration firm generated more income than ever and profits easily beat expectations. That, and a better tax rate, sparked a round of earnings upgrades, yet the shares still trade at a huge discount to US peers.

Revenue leapt by 23% in the year ended 30 November to £104 million, driving pre-tax profit up by a tenth to £8.4 million and earnings per share (EPS) to 14.4p. Making more money in the UK where corporation tax is lower is certainly a help. Porvair ended the year with net cash of £5.3 million, too, despite heavy capital investment. The dividend rises 10%.

The smaller metals filtration unit grew the top line by 6% to a record £30.1 million following market share gains in the US and China. That helped offset a weak aluminium price, and operating profit rose by 7% to £2.6 million. At constant currency it was 11% and 13%.

It's a rather more complicated picture at the core microfiltration division. Supplying filters used on the big aerospace programme like Boeing's 787 and the Airbus A350 and A380s meant brisk business, and revenue soared by a third to £73.9 million. Aerospace sales added 7% and demand for industrial filters in the US was up by 18%.

Profit, however, edged up just 1% to £8.7 million. That's because big gasification contracts signed with POSCO, Reliance Industries and the UK government in recent years chipped in £19.5 million of revenue last year versus £6 million in 2013. Strip that out and divisional sales were up a more modest 9%. There's more to come from these deals and a new $10 million gasification contract with CNOOC in China should contribute next year.

Still, Porvair chief executive Ben Stocks told Interactive Investor that the company should be able to growth earnings by 10% a year - "half due to markets and half our own effort". But because the large contracts gradually drop out, broker Peel Hunt is pencilling in revenue of £95.1 million for 2015, down 10%, before rising thereafter. Look for adjusted pre-tax profit of £9 million, up 7%, and adjusted EPS of 15.1p in 2015 as Porvair continues to benefit from a smaller tax bill.

According to Peel Hunt, the growing stream of recurring revenue is still not reflected in the share price, which it reckons is heading for 342p. "The share price for the US quoted peer, Pall Corp, continues to be strong, and now trades on 26x Jul 2015E, a 30% premium to Porvair. Our TP continues to be based on 18x our potential FY2017E EPS of 19p (rather than the 16.8p we formally forecast)."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.