Mining demand drives a 55% increase in profits for this UK manufacturer.
On the day that the UK officially slips back into recession, it is reassuring to know that we still have some quality manufacturing businesses that are delivering strong growth and rising profits.
A real belter
A case in point is Fenner (LSE: FENR), which published its half-year results today, revealing revenues of £412m -- up 24% on last year -- and operating profits of £50.2m, a 55% increase on the same period last year.
Over the last five years, Fenner's annual revenues have risen from £380m to £718.3m, and they are set to top £800m this year. During that time, its share price has doubled -- although anyone who bought in at the height of the slump in 2009 will now be sitting on a ten-bagger!
Belts and seals
Fenner is a manufacturing business with two main divisions. The first of these is its Engineered Conveyor Solutions, which makes conveyor belts for coal mines and other industrial applications. Demand is strong from the global mining industry and Fenner's ECS division delivered a 25% increase in revenue and a 62% increase in underlying operating profit over the last six months.
Fenner's other division, Advanced Engineered Products, makes products such as specialist hydraulic seals, which it sells to the oil, gas, mining and agricultural industries. Revenues for this division rose by 20% over the first half, delivering a 23% rise in underlying operating profit.
Despite its earnings increasing at a slower rate to last year, Fenner has a PEG ratio of 0.46 based on the last six month's earnings, up from 0.2 last year. A PEG below one suggests a strong bias to growth, and I believe that Fenner's strong growth will continue for at least one more year, albeit at a diminishing rate.
Fenner has a rolling 12-month net debt to EBITDA ratio of 1.0, down from 1.3 at the end of 2011. Although this reduction is due to rising earnings, not falling debts, its net debt of £126m is not too burdensome and should be manageable even if earnings growth tails off.
Fenner isn't an income share, but the company has increased dividends steadily in recent years and announced a 32% increase in the interim dividend for the first half of the year, putting it in line to deliver a total yield of 2.3% for the year at today's share price.
More to come?
Fenner reminds me a little of Aggreko (LSE: AGK). It's a successful business that has delivered remarkable growth over a number of years. Like Aggreko, Fenner's current rate of growth cannot be maintained forever and when it eventually moderates, the shares are likely to be re-rated somewhat.
Despite this, I think that Fenner will continue to deliver strong growth for the next year or two at least, and would make a good investment for anyone looking for a maturing growth play that will benefit from strong global demand for commodities.
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