There was a reminder of a London Stock Exchange success story today (24 June). It’s Volution Group (LSE: FAN), the FTSE 250 ventilation product supplier that’s celebrating its 10th anniversary.
This is a stock that I’ve owned in the past but sacrificed to consolidate my portfolio. Given this milestone though, now seems like an opportune moment to take another look. Should I rebuy it?
Happy anniversary!
Volution is a leading supplier of ventilation products for residential and commercial buildings. On 23 June 2014, it listed at an offer price of 150p per share, implying a market cap of £300m. At market close on 21 June, the share price was 454p, giving a market value of £908m.
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This means the stock has increased by 203% — an excellent return.
But there’s more because Volution is healthily profitable and pays dividends. Factoring those in over this period, the total shareholder return has been 272%. This smashes the equivalent FTSE 250 return of 71%.
Why has the stock done so well?
In the short run, the market is a voting machine. But in the long run, it is a weighing machine.
Warren Buffett
Solid profitable growth is arguably the number one thing that firms are judged on by investors over time. After all, who wants to put money into a business that’s posting losses indefinitely? That’s a one-way ticket to oblivion.
Over this period, Volution has delivered a compound annual growth rate of 13.3% in revenue and 12.7% in adjusted earnings per share. Nice. Last year, the operating profit margin was around 17%.
As part of its growth strategy, it has undertaken 21 acquisitions across the UK, mainland Europe and Australasia. The company is now present in 17 countries and generates 60% of its revenue from outside the UK. I like this geographic diversification.
CEO Ronnie George commented: “Our successful track record is testament to our strong corporate culture, differentiated business model, compounding growth strategy and consistent delivery over the last decade.“
Strong environmental and regulatory tailwinds
The company’s purpose is to provide healthy indoor air sustainably. Today, 70% of revenue is derived from low-carbon products, a significant increase from 43% in 2014.
Over 30% of this revenue comes from heat recovery ventilation systems. These recover heat from outgoing exhaust air and transfer it to incoming fresh air. This reduces the energy needed for heating buildings in cooler climates, and should be a long-term growth market for the firm.
There’s also heightened global awareness around the importance of indoor air quality. For example, we now know the harmful effects of mould on health, which is driving increasing governmental regulation. So this is another growth tailwind.
My move
Looking forward, Volution’s energy-efficient building solutions are well-positioned to benefit from decarbonisation trends. However, the ventilation market is also competitive, with established players and new entrants all offering similar products.
Increasing competition could eventually squeeze profit margins, as could a spike in commodity prices, particularly steel. The construction industry is also cyclical.
Meanwhile, the stock is trading at 21.5 times trailing earnings, which looks a bit pricey to me. And the market’s only forecasting 4%-6% revenue growth up to 2026.
Weighing things up, I reckon there are better opportunities for my money right now.
