Porvair leaps into big league

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The Independent Online
PORVAIR, a manufacturer of highly specialised permeable materials in Norfolk, has just done a US deal which comes close to doubling the size of the group. Porvair is already achieving strong growth, but this acquisition catapults the formerly tiny group - with 1994 sales and profits of pounds 24.8m and pounds 3.lm respectively - into a substantial business, with a stock market value of more than pounds 100m and a strong position on both sides of the Atlantic.

Two years from now, profits for the enlarged group could easily top pounds l0m. Not surprisingly, institutional investors have become interested and the shares have moved up to an all-time peak of 360p. But that could be just the beginning. My forecast is that these shares will be up more than 50 per cent to 550p in two years, and even that could be conservative.Of course there is a risk when a company makes a big acquisition, doubly so when it is overseas, but Porvair looks well placed to benefit from this one.

The business acquired, Selee, makes ceramic filters for metal purification. These can filter molten metals such as aluminium and iron for use as thin-walled cans or car engines respectively. The purification improves the quality of the final product and ensures fewer rejects. Selee, which was a management buy-out from a Swiss parent in the early 1990s, is already the market leader in the US and is, by a short head over Foseco, the largest player in the world in this market. In its last 10-month reporting period, it made pre-tax profits of $3m (pounds l.9m) on turnover of $22.lm.

Apart from making the enlarged group a more rounded and credible operation, the acquisition is likely to strongly enhance earnings. The total maximum consideration is $37.8m with, in round numbers, $32m payable up front, mostly in cash, and $6m deferred into 1996 and 1997. The Selee management are part of the deal, taking a quarter of their consideration in Porvair shares, with an extra allocation if profits reach $4.8m this year and $5.6m next year. Because of the growth opportunities facing Selee, the Porvair management expects both these figures to be easily achieved. Indeed the Porvair finance director, Ken Symonds, says he will be disappointed if the $5.6m target is not "considerably surpassed".

Mr Symonds lists four reasons for expecting Selee to do well. First, such companies as General Motors are substantially increasing their purchases of filters, which are disposable products. Secondly, much of the market is still held by older sleeve-based products which are not as effective as the sponge-based filters, leaving potential for the latter to double their market share from $70m to $140m worldwide. Third is the European opportunity. The terms of the original buyout excluded Selee from selling in Europe until August last year. A new factory has just come on stream. Before the buyout European demand was mostly satisfied by US-made products. Last is the new products opportunity. Like Porvair, Selee spends heavily on research and is poised to take advantage of new opportunities such as the imminent US requirement for even small petrol-powered motors, such as those in lawnmowers, to have ceramic-based catalytic converters.

Porvair was an attractive investment opportunity even before Selee came along. Despite recession, profits have grown steadily from pounds 1.51m in 1990 to pounds 3.11m last year.

Interim figures, released alongside the announcement of the Selee purchase, show a sharp quickening in the pace of growth. Turnover rose by 51 per cent to pounds 15.3m, with pre-tax profits up 32 per cent to pounds l.26m. The main reason for the slower rise in profits is that the group is investing heavily in future growth, which absorbs some profitability short term. For example, it has developed an innovative form of printing blanket (a consumable used in the printing industry) which could lead to a significant share in a world market measured in hundreds of millions of pounds.

An encouraging feature of the results was a strong upturn by Permair, the original group business, making a plastic membrane which can give low-grade leather the characteristics of material of much higher quality.

Stockbrokers' analysts are forecasting profits reaching pounds 5.3m in the year to November, followed by pounds 8.5m for 1995-1996. On those numbers, the price- earnings ratio drops to the mid-teens for 1995-96, the first year with a full contribution from Selee. That is good value for a business which looks poised for many years of above-average growth.