October 30, 2012 9:33 pm

Porvair reports 13th earnings upgrade

At a time when profit warnings from British industrial companies are becoming all-too regular occurrences, investors have been forced to filter through downgrades in order to find some semblance of positive news.

However, one British engineer has quietly gone about its business without the trading shocks, and recently reported its 13th consecutive earnings upgrade. Porvair, the UK’s only listed filtration group, has over the past few years navigated the choppy macroeconomic conditions battering its peers.

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The run of upgrades is in contrast to a recent run of dismal trading statements from GKN, Morgan Crucible, Cookson and Aggreko, which have prompted investors to expect downgrades from almost any industrially focused UK company.

But for a British company exporting globally, the industrial filter-maker’s 13 consecutive upgrades stretching back to mid-2010 is almost unheard of.

The run followed a dismal period for Porvair, when it swung to a first-half loss of £600,000 in 2008, weighed down by a series of exceptional charges for redundancies as the business was restructured to cope with the recession.

Ben Stocks, chief executive, described 2009 as “the most challenging year that anyone can remember”. Porvair’s shares fell below 50p – less than one-third of their value three years earlier. Since then, the Norfolk-based group’s shares – underpinned by a 17 per cent stake held by Giorgio Girondi, an Italian industrialist who owns a filtration company – have climbed steadily. They closed on Tuesday at £1.35p.

Andrew Shepherd-Barron at house broker Peel Hunt last month upgraded his pre-tax profit forecast from £5.6m to £5.9m for the 12 months to the end of November, on revenues of £82.2m. “The pipeline looks good, and supports our forecasts further out,” he said.

Porvair makes fuel and coolant filters for most of the world’s commercial aircraft, including all Airbus and Boeing models as well as for a number of the regional jets built by companies such as Bombardier and Embraer.

These filters range in price from £40 up to several thousand, and are usually replaced every 10,000 flight hours.

“We have not been immune to recessionary pressures – when the world turns down, so do we. But the thing about filters is that they are replaced on a regular basis, which provides us with a steady revenue stream,” says Mr Stocks.

“Aerospace is our single biggest area, and critically our business is spread between new-build and after-market services. We have been much less exposed to Asia and Europe than a lot of other industrials,” he said.

The group’s technology is also used to make aircraft fuel tanks inert during refilling – a process that involves flooding empty tanks with nitrogen to negate sparks.

Recent legislation has made such technology compulsory on new-build aircraft, while retrospective implementation is soon to be required by all older commercial aircraft.

The group has benefited from strong orders in North America – a region that comprises more than half Porvair’s sales – helped by increased production at Airbus and Boeing.

Although Porvair is exposed to many of the same macroeconomic factors and markets as larger rival GKN, the smaller group earns about half its revenues from the US, while GKN has been hurt by headwinds in the European vehicle market.

“Porvair’s metals filtration division is located in the US with the majority of its revenues also generated in North America. This means it is less likely to be affected by any European slowdown in this sector than GKN might be,” say analysts at Daniel Stewart.

The other part of Porvair’s business is the manufacture of ceramic filters used to purify molten metals, and the group’s technology is used to clean more than half the global supply of aluminium each year.

The division brings in about 40 per cent of the group’s revenues, and Porvair has been further buoyed by a switch towards pricier but more environmentally friendly phosphate-free filters.

The group has a multiyear deal to supply Alcoa, and has moved most customers to its patented and premium priced CS-X aluminium filters, which has in turn edged up operating margins to 8 per cent, pushing the group closer to its target of 10 per cent.

Other potential areas of growth include gasification, where heat and pressure are applied to coal to filter out natural gas. Porvair last year signed a two-year $10m deal to supply equipment to a major coal-to-substitute natural gas project run by Posco, the South Korean steelmaker.

With only 500-odd employees working at operations in the UK, US and Germany, and a market capitalisation of about £58m, Porvair is a Cessna in the engineering world of Jumbos and Superliners, but one with a relatively clear flight path.

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