Advocates of the efficient market hypotheses preach about how a firm’s current stock price fully reflects available information about the current value of the firm, thus active investing does not yield alpha. However, this proposition is proven flawed by the existence of undervalued and overvalued firms. An example of which is perhaps MayAir Group. MayAir Group manufactures, develops and provides air filtration equipment and clean air solutions to the industrial, commercial and residential markets. It is a Malaysian-based company which IPO’d on the Alternative Investment Market in May 2015.
Its industrial clean air solutions provides fan filter units to businesses requiring cleanrooms. Clean rooms are a controlled low pollutant environment and are utilised predominantly by pharmaceutical companies, hospitals and food & beverage businesses. Its commercial clean air solutions provides air filtration equipment to venues such as office buildings, airports, subways and hotels. While the residential division targets property developers with unique clean air solutions.
Interim results for the 6 months ended 30 June 2015 (H1) saw the industrial market account for 81% of total revenue, replacement parts (for completed industrial market projects) amount to 13% of revenue and the commercial market for 6%. The newly established residential division made immaterial contribution to revenue. Furthermore, the company’s primary geographic market is China, where it derived around 96% of its first half (H1) 2015 revenue from.
The company has increased revenue consistently since 2012 at a compound annual growth rate (CAGR) of 33.3%. Its interim results for the H1 2015 saw a 49% increase in revenue to $31.6m (H1 2014: $21.2m). Thus assuming revenue stays flat for the second half of 2015, we can expect full year revenue to be $63.2m, a 44.3% increase from $43.8m in FY2014. More impressive, the company has demonstrated a history of earning power.
MayAir has a net profit CAGR of 70.8% and is expected to achieve net profit growth of at least 13% for FY2015. Return on capital employed sits at a very healthy 17.4% and they possess double digit operating margins of 14.4%. Thus their market cap of £39.9m is an undervaluation of their growth prospects. Their price to sales stands at 1.05. This figure drops below 1 when you use forecasted sales for FY2015. Their trailing price to earnings ratio (P/E) stands at 12.8. In comparison, the FTSE 100 filled companies with either declining, flat or snail growth earnings trades on a trailing P/E of 16.5. Furthermore, MayAir trades on an extremely attractive price to earnings growth rate of 0.71.
Going forward, the company stands to benefit from a number of tailwinds. Firstly, the industrialisation of the Chinese technology sector. This helped boost industrial market sales in H1 2015 by 70% from H1 2014. Furthermore, there may be anticipation of the ‘red alert’ issued in Beijing in December, 2014 due to the high levels of smog to boost demand for MayAir’s clean air solutions. In addition, new regulation pushing for improved air quality in Chinese cities could also created more revenue growth opportunity.
However, the company faces risks from its overdependence on China for revenue. The Chinese economy is expected to experience a drastic slowdown in growth over the next few years, thus MayAir’s revenue growth could face some downside. But with the onset of industrialisation the desire for improved air quality to prevent health issues has increased. Clean air fosters an improved quality of life and opportunity. It is a fundamental human need and thus perhaps MayAir is able to capitalise on this opportunity.