One of the dilemmas facing us investors right now is that firms with cyclical operations look quite cheap when measured against traditional valuation indicators. But there’s considerable uncertainty about the macro-economic outlook. Should we buy these cheap shares or avoid them?
Cracking results
Take ventilation products supplier Volution (LSE: FAN), for example. The shares look perky today on the release of a robust-looking full-year results report. Revenue came in almost 15% higher than last year, adjusted operating cash flow moved up a little over 7%, and adjusted earnings per share increased by just over 10%.
The firm managed to reduce its net debt figure by a shade above 3% to around £75m, and the directors offered their seal of approval by pushing up the total dividend for the year by 10.4%, suggesting confidence in the outlook. Everything looks fine in the figures, yet the valuation strikes me as undemanding.
The recent share price, close to 175p, puts the forward-looking earnings multiple at around 10 for the trading year to July 2020 and the anticipated dividend yield at just under 3%. But will the five-year financial record since listing on the stock market continue? Revenue, earnings and the dividend have grown a little each year over that period, driven by both organic and acquisitive growth. But what about Brexit? Will the UK’s exit from the European Union pull the rug from under the business?
Brexit? Not that bothered
The directors have examined the likely effects of a no-deal Brexit and, in today’s report, said the new potential tariffs likely don’t “represent a significant impact.” But just to make sure things run smoothly after Brexit, the firm has increased inventory levels of faster-moving items “in certain locations.”
The main risk, as the directors see it, is the potential for “a broader downturn in confidence and activity levels in the UK,” because of Brexit when it happens. To put things in perspective, the UK market provides Volution with just under half its revenue. Meanwhile, 22% originated in the Nordics in this reporting period, 15% from Central Asia, 10% from Australasia, and around 5% by exporting from the UK.
Chief executive Ronnie George explained in the report that the strong results were driven by improving organic revenue growth and an “excellent” contribution from acquisitions made “in the prior and current financial year.”
New product launches and cost-saving measures have contributed to the operational momentum, including a factory rationalisation project in the UK. Two older and “capacity-constrained” facilities were “consolidated” into a purpose-built injection moulding, ducting extrusion and fan assembly facility in Reading.
There may be economic uncertainty in the air, but Volution is carrying on with its plans, which include an eye on “ambitious” growth plans in Australasia. I think the stock looks attractive and could be worth buying as we near the Brexit end-game.
