Jefferies reiterates ‘buy’ rating on Volution

Jefferies reiterated its ‘buy’ rating on Volution on Wednesday as it said the company’s ability to drive margins higher, through both revenue mix and efficiency, is more than offsetting the challenging market backdrop to deliver ongoing earning upgrades.

"As the macro environment improves, and regulations tighten further, we see scope for the group to deliver organic revenue growth towards the top end of its 3%-5% target range," Jefferies said.

"With leverage at the lowest level since FY15, ongoing M&A can compound attractive earnings per share growth."

The bank said it continues to be impressed by Volution's operational performance and the recent 1H24 results showed that robust organic revenue growth - driven by UK Residential - has been supplemented by further EBITA margin gains.

"We believe these margins, in excess of the more than 20% target, will endure aided by improved supply chains allowing for a more efficient manufacturing process and greater regulation driving the market towards more sophisticated, higher-margin solutions.

"Indeed, it is these same dynamics on the regulatory front that make us confident that as the challenging macro subsides under a lower interest rate environment, Volution can push its organic revenue growth back towards the top end of its target range."

Jefferies also said that M&A remains a near-term catalyst.

"M&A, namely consolidation in a fragmented European market, is a key pillar of the Volution investment case," it said. "Recent years have seen the group move back down to a more sustainable level of activity (£30m spent in 2023), and post Covid inorganic revenue growth has averaged 6% per annum, in line with the group's growth algorithm.

"With Net Debt:EBITDA at its lowest level since FY15, we expect to see further activity in this area, and believe that up to £100m could be spent without exceeding a 1.5x Net Debt:EBITDA level. Such a level of spend would provide 7% EPS accretion, by our estimates."

The bank has a 510p price target on the shares.