Premium content from Motley Fool Hidden Winners UK
Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.
“Best Buys Now” Pick #1:
Porvair (LSE:PRV)
Why we like it: We tend to like ‘recurring revenue businesses’ here at Hidden Winners. And with good reason. Sales that regularly repeat are great for both management teams and outside investors seeking to forecast how the business will develop in the years ahead. High amounts of recurring revenue are one of the main attractions of Porvair (LSE: PRV) – a designer and manufacturer of specialist filters for a wide range of end sectors. This isn’t a sexy Software as a Service business with monthly or annual recurring revenue counted in the hundreds of millions and growing at double-digits. But it does have recurring revenue all the same.
Porvair and the filters it makes aren’t the most exciting subject ever. But as its often-patented filters aren’t easily interchangeable by its customers, the company generally watches as the cash rolls in when these specialist filters are replaced at regular intervals. Even if the business itself isn’t glamorous, since the Financial Crisis the steady, profitable growth and shareholder returns the company has generated have been quite exciting. We think Porvair is a great example of a boring, dependable business that could generate impressive returns going forward too.
Why we like it now: Taking a quick glance at Porvair’s recent full-year results one would be forgiven for thinking they were pretty ‘meh’. Revenue was only up 2% and 1% in constant currency terms to £176m. But underneath the hood, things were much better. That revenue performance came despite post-pandemic declines in Laboratory sales related to Covid-19 detection and ongoing macroeconomic uncertainty that led Industrial clients to run down existing inventory rather than spend the cash on replacements.
Given those headwinds we were happy with the company’s sales performance and even more impressed with the 7% uptick in operating profits to £21.2m. The company’s focus on profitability was also positive for cash flow and the group ended the year with a hefty net cash position despite continuing to re-invest in organic and inorganic growth via bolt-on acquisitions. Porvair has impressed us as a steady business over the years we’ve covered it and FY23 results, while not racy, saw the group hit record highs in sales, accounting profits, and cash flow. With that track record and impressive growth prospects ahead, we think it’s worth considering this month at its current valuation of just under 19x trailing earnings.
