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I have some extra money to invest this month and have been scouring the FTSE 250 to add shares to my portfolio. There are plenty of opportunities to choose from, with the index down 20% from 18 months ago.
But Evolution Group (LSE: FAN) has caught my attention, having everything I’m looking for in one stock.
What does the firm do?
Volution, founded in 2002, manufactures and supplies ventilation products to the residential and commercial building markets in the UK, Europe and Australasia. That includes everything from simple extractor fans to more complex whole-house ventilation systems. The company’s mission statement reads: “Our purpose is to provide healthy indoor air, in a sustainable way..”
The company has successfully expanded into Europe and Australasia through a series of follow-on acquisitions. The group is now made up of 19 key brands in three geographic regions. The UK accounts for around 38% of total sales, Europe slightly less at 36%, and Australasia accounting for most of the rest.
Most of these markets remain fragmented, making them ripe for further consolidation. And Volution’s strong balance sheet should allow it to gain strategic market share.
strong results
Yesterday, the company reported strong results for the six months to January 31. Revenue rose 8.5% year-on-year to £162.3m, while adjusted operating profit rose 7.1% to £34.2m. Pre-tax profit rose almost 6% to £22.6m. There was organic growth in all three geographic regions.
CEO Ronnie George, who has been at the helm since 2012, noted that homeowners and homeowners have been addressing mold and condensation issues. Rising energy bills caused people to turn down their heat, leading to air quality issues. This helped its UK residential arm increase revenue by 16% in the first half.
At 21.1%, the company’s adjusted operating margin remained above the 20% target set by management. And the interim dividend increased 8.7% to 2.50 pence per share. The return is modest at 1.86%, but the payout has been compounded at a five-year growth rate of 12%.
Looking ahead, management noted that supply chain and inflationary challenges are easing. And with homeowners, landlords, and renters becoming increasingly aware of the dangers of poorly ventilated properties, the future for Volution looks bright to me.
The stock is now trading at 17 times consensus forecast earnings. It should be noted that this is higher than the index average, which could present a level of valuation risk. But at 394 pence, the shares are still 30% below the price of 560 pence reached in September 2021.
environmental trends
A recent report from Imperial College London revealed that the UK’s 28.6 million households are among the least energy efficient in Europe. They lose heat up to three times faster than on the mainland, making people colder and ultimately poorer.
This situation will need to be properly addressed by the government at some point, particularly as households account for 30% of the UK’s total greenhouse gas emissions. Again, this should all benefit Volution, with its market leading range of energy efficient residential heating systems.
I’m buying the shares
The evolution is closely aligned with powerful environmental, health and regulatory trends. It’s growing very well, both organically and through acquisitions, and there’s a growing dividend backed by strong financials.
As a result, I am ready to keep some shares in my ISA for years to come.
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