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Volution - Four-fold profit growth in 13 years for heating & ventilation specialist

May 2023

Investing in shares may lose you all or some of your money. Past performance is no indication of future performance. Some of the shares recommended here may be small company shares, which can be relatively illiquid and hard to trade and this makes such shares more risky than other investments.

  • Epic Code:
  • FAN
  • Price:
  • 414p

Global warming has increased the odds of more frequent, extreme and longer heatwaves. Last year we saw extreme heatwave events across the world: the 100 degree heatwaves in California and the UK; wildfires in Europe; and the most powerful snowstorm, hurricane and typhoon in living memory in New York, Florida and Japan, respectively.

Jeremy Clarkson, host of Clarkson’s Farm, might sarcastically say that the only way the UK can become carbon neutral is if we all turn to Zoom to see our friends and also, “if animals such as cows and giraffes and any other animal that burps methane becomes illegal.”

Against that genuinely alarming backdrop, the Paris international treaty in 2015 (renewed by COP-27) has moved from a time for words to a time for action with a cap on temperature rises to just 1.5 degrees above pre-industrial levels by cracking down on carbon emissions. To get there, greenhouse gas emissions must peak by 2025 and decline 43% by 2030. This has led to a blizzard of ever tighter building regulations not just for new builds but also existing ones, creating a potential boom in heating and ventilation products and this is one reason why I have alighted on Volution, a highly profitable market leader in domestic ventilation, which makes almost 70% of its sales from carbon reducing products.

As the chart on page 2 shows, the shares have performed well, but that only gives partial credit to the terrific record of CEO Ronnie George, who I met again with over the month. Between FY’09 and its listing in 2014, Volution’s sales had risen from £72m to £121m and EBIT profit from £15m to £26.5m while as a quoted entity they’ve taken off again to £308m and £64.9m, respectively, in FY’22 (year-end June), implying eight-year growth of 155% and 145%. In light of the recent interim results ended December, which were ahead of forecast, brokers have upgraded and now expect sales of £324m, £337m and £355m between FY’23-’25 for EBIT of £67.6m, £69.7m and £72.8m.



Volution can trace its origins back to 1936 when Vent-Axia, a long-established high-end ventilation firm, invented the world’s first window ventilation unit, which was electrically operated and made of Bakelite. In 2002, the business was subject to a management buy-out from industrial conglomerate Smiths Group and after being fattened by the acquisitions of Baxi Air Management (centralised ventilation, heat recovery systems) and Manrose (budget residential and commercial ventilation), it was flipped from Montagu Private Equity to ABN Amro and then Towerbrook in 2012, with the latter appointing Ronnie George as CEO.


Acquisitions: 18% ROIC hurdle

I originally met George shortly after it listed at 150p in 2014. At that time Volution was dominated by its market leading UK operation, complemented by a small European business in Sweden and Germany, but he made clear to me his ambition to become the number one in Continental Europe and like Ronseal he has pretty much delivered what was written on the tin with an impressive 19 acquisitions completed since listing. George says Volution has a well-drilled approach to acquisitions including a minimum hurdle of 18% return on invested capital within three years, by adding new products from the wider group; improving supply chain / better buying; innovation to reduce the acquired firm’s  costs; better pricing discipline; coaching for owner managers on how to work in a larger company - typically acquired ones make just 2-4% turnover of Volution and persuading them to stay long-term.

19 acquisitions

Within its first two years after listing it had snapped up smaller European rivals Fresh and Pax in Sweden (a combined £20.5m) followed by inVENTer, a leader in heat recovery systems in Germany (£20.1m), Ventilair in the Benelux (£11.6m) and Energy Technique (£9m, adding fan coils).  Average price paid for these was a keen 7.4x EBITDA.

George says while Volution could have expanded organically, the credibility of owning a local brand is key to cracking these markets, while in recent years he has been prepared to pay more for companies with commanding market shares. These larger deals  include Simx in 2018, a 40-year old market leader of residential ventilation systems in New Zealand for £37.8m, which sells both Manrose but also its own higher value brands such as Smart Vent (whole house ventilation) and Heat Trans (heat transfer systems).

Piggyback £630 billion climate renovation funding

In a move to piggyback on generous EU funding for renovation, with the EU’s Green Deal for 2021-2027 allocating a massive £1,900 billion including one-third for climate projects, Volution later acquired 75% of ClimaRad (£38m), market leader in the Netherlands for “de-centralised” (single room) heat recovery ventilation systems. Adding manufacturing expertise, it then bought Energy Recovery Industries (ERI) in 2021, which makes low-carbon heat exchanger cells in North Macedonia and supplies the Italian, Spanish and UK markets for £20.8m. These deals added expertise in heat and energy recovery ventilation systems ( 32% group sales) providing entry to  a new and large market projected to grow from US$3,019m in 2020 to reach US$4,467m by 2028 (+5.6% CAGR).

The prices paid for those deals were between 11.1-11.8x EBITDA, which sounds a touch pricey but pre-synergies Simx was already making EBIT margins of 16.7%, ClimaRad a whopping 41.8% and ERI 17.6%. As George says, the best way to view Volution’s progress is to look back at the IPO, when its European operation was generating EBIT margins of just 10%. That has since soared to 24% as at H1 ‘23. Also, Volution now has three extremely profitable geographical territories and has expanded its footprint into Continental Europe and Australasia (the UK is now just £15.6m or 43% EBITDA with Continental Europe similar at £15.4m and Australasia (mainly NZ) £5.5m).

Three product categories

Volution is the dominant supplier of domestic ventilation products and systems in the UK, Continental Europe and Australasia. Its products include extractor fans (axial and centrifugal), ventilation and heat recovery systems as well as associated fittings and ducting. Increasing awareness of the link between pollution and lung diseases such as asthma, bronchitis, emphysema, as well as the shocking death of a boy living in Rochdale social housing, which led to tighter Government regulations (Awaab’s Law requires housing associations to fix mould issues within specified timeframes) has increased demand for its products. Aside from a manufacturing plant in Macedonia, it’s mainly an assembler of equipment for use in ventilation, using bought in electric motors and printed circuit boards (PCBs). Its footprint comprises seven UK facilities (including an injection moulding plant in Reading), Germany, Netherlands, Belgium, Sweden, Bosnia, Italy, Spain, N. Macedonia and two sales offices in Australia and New Zealand. Its UK market share was c. 35% at IPO and is now “too high to disclose,” says George, while it notably has 25% in Germany, a large market for heat recovery systems.

Push and pull model

Volution adopts a “push and pull” model for getting its product to market. It “pushes” its product to smaller end-users such as local builders, builders merchants, electrical wholesalers and hybrid retailers like Screwfix, while it “pulls” through product with contract specifiers (architects, mechanical & electrical contractors), developers and large house builders including a recent tie-up with Barratts. Around 30% group sales are for new builds and the remainder is RMI.

As George says, there are three tiers of spending: traditional extractor fans (de-centralised systems) used in bathrooms, kitchens and utility rooms typically costing £100-£150 for a 3-4 bedroom house; more onerous carbon reducing ones (£200-£400) and mechanical ventilation including heat recovery (MVHR) systems for the whole house (centralised systems), which cost up to £1,000 including accessories.

Innovation and smart technology also play their part in lifting average selling prices. As Aldous Huxley might say, it’s a brave new world for gadgets. As examples, George says if you have a party and the amount of carbon dioxide rises to a level that could affect your health (making you feel sluggish) a sensor might now automatically increase the air flow, while those on holiday can remotely, from an app, put the system into holiday mode to reduce energy consumption. There are also key applications in the public sector where Housing Association landlords can use an app to track whether a tenant is using their fan correctly and for the right amount of time if there’s a dispute over damp or mould issues.

Higher value Heat Recovery

The Holy Grail for Volution is to encourage purchasers to trade up from low tech single room fans to higher value low carbon and in particular the larger centralised systems, and there are two tail-winds driving this trend. The first is Volution’s expansion into heat recovery ventilation systems, boosted by the acquisitions of ClimaRad and ERI.

Heat recovery ventilation systems are used to heat or cool the incoming outside air and replace it with the stale outgoing air to maintain a stable overall temperature. Depending on the season it also either removes excess moisture or adds more (usually air is more humid in summer and drier in winter), which also reduces the energy required to control the building’s climate. A further important benefit is that heat recovery ventilators eliminate the pathogens, bacteria and viruses from the outside air going into the building.

Tighter Building Regs drive demand

A second tail-wind driving demand for its higher value systems is the political push to end carbon emissions. The UK Government became the first major economy in the world to pass laws to achieve “Net Zero” in 2019, effectively ending its contribution to global warming by 2050. Interestingly, Blighty had already reduced emissions by 42% from 1990 levels, in large part by reducing the energy consumption emitted by homes (30% of total energy consumption). Successive Governments have tightened building regulations for new homes (Part L) to improve energy and power conservation and prevent carbon escaping into the atmosphere; George says a typical AC fan used to require 30-40 watts, now it’s just 5. As a result, new buildings have become more air tight but they must also comply with Part F (ventilation) as air tight buildings need better air flow without losing warmth and this double whammy has been great for Volution.  

£125m for acquisitions

With even tighter building regs in the pipeline, the outlook is therefore positive but there’s one other factor that could also drive eps growth - further M&A. With little capex required, Volution throws off considerable amounts of free cash flow and George expects net debt / EBITDA to drop from 0.8x to just 0.4x this year and zero in FY’24 and with a maximum headroom of 2.0x, that implies firepower of up to £125m for further acquisitions.

Therefore, while at first blush the prospective PE of 16.9 (eps: 24.5p) falling to 16.2 (25.5p) next year doesn’t appear cheap, it could fall sharply as deals flow in. The fact that 76% of its plastic is recycled may also attract ESG focused funds to its shares. I am a buyer.

With small companies there is an above average degree of risk compared to buying blue chips. Please be aware that we have not assessed the suitability of any of these investments for you. The newsletter simply states a personal view and diarises the editor’s investment decisions. Please speak to your stockbroker or other qualified individual to ascertain whether any of these companies mentioned would form useful additions to your own portfolios. Past performance is no indication of future success.

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