These two FTSE 250 companies have been flying over the past five years. Is there a danger they could suddenly come crashing back to earth?
Spirax spirals
Spirax-Sarco Engineering (LSE: SPX) is a multinational engineering group made up of two businesses, Spirax Sarco for steam specialities and Watson-Marlow for niche peristaltic pumps and associated fluid path technologies. Its job is to help customers save energy and water, boost efficiency, improve product quality and make improvements in plant health, safety and regulatory compliance.
The company’s share price has soared a dizzying 70% in the past 12 months and is up 180% over five years. Earlier this month it comforted investors by reporting that anticipated, organic sales growth in the first four months of the year beat last year’s. It expects sales and profits to rise 5% and 8% respectively year-on-year, at broadly constant currency rates.
Cash is king
Spirax-Sarco Engineering is growing through acquisition, buying steam specialities business Gestra for £160m earlier this month, and long-term target US electrical products provider Chromalox for £319m, in a cash and debt-free transaction last week. The purchase fits nicely alongside its existing operations and the company’s share price bounced more than 8% on Friday.
There is just one sticking point: the company currently trades at a pricey 33.25 times earnings. This is partly justified by its growth prospects, with earnings per share (EPS) forecast to rise a hefty 19% this calendar year, and another 8% in 2018. Even that will only reduce the valuation to 26.5 times earnings. Revenues and profits look set to rise strongly, although this cash generative business only yields 1.33%. It nonetheless looks a tempting buy, with a net cash balance of £60m prior to the Gestra acquisition, although possibly one to save for a market dip.
Get real
Assura Group (LSE: AGR) is the UK’s leading healthcare real estate investment trust, specialising in designing, building and managing a portfolio of nearly 400 GP surgery buildings and primary care centres. Recent share price growth has been so-so and the stock is up just 7% over the past year. But over five years it has grown 109%, and this success has lifted its valuation to more than 25 times earnings, which is somewhat heady.
Its recent full-year results appear to justify that kind of valuation, with continued growth across its portfolio, rents, profits and dividend. Assura posted a 21.2% increase in investment property to £1.3bn, 16.6% increase in rent roll to £74.4m and a 20% rise in EPS. Investors were duly rewarded with a 9.8% increase in its fully covered dividend, from 2.05p to 2.25p.
Primary investment
Assura also has a strong pipeline with £153m of acquisition and development opportunities, and management stating that the “overwhelming need” for improved primary care premises underpins the company’s future. Both the Conservatives and Labour have made commitments to improve NHS buildings in the next parliament.
The company’s EPS are forecast to grow steadily, by 7% in the year to 31 March 2018, and another 7% in the year afterwards. With a forecast yield of 4%, Assura offers an attractive income stream as well as positive growth prospects. There are good reasons why it isn’t dirt cheap.
