At the beginning of March, we highlighted three mid-cap stocks which for one reason or another were trading well below what we believed was their intrinsic value and therefore had the potential to generate significant gains for investors.
One of these was water, climate and ventilation solutions firm Genuit (GEN), better known to seasoned investors as Polypipe before a name change.
TURNING THE CORNER
As we flagged at the time, expectations for 2024 were low due to a subdued trading environment but we had an inkling an improvement was in the offing with both new-build housing and the RMI (repair, maintenance and improvement) market set to improve this year.
A couple of months later, in mid-May, the firm posted a positive four-month trading update and confirmed its 2025 guidance thanks to ‘encouraging signs of recovery’ in its key markets, sending the shares up 14% in a day.
Chief executive Joe Vorih commented: ‘Each of our Business Units has delivered organic sales growth for the first four months and we have secured some positive share gains in a competitive market. We are also making strong progress on the continued deployment of the Genuit Business System to drive productivity.’
While we the broader macroeconomic backdrop remains uncertain, Genuit isn’t directly exposed to changes in trade tariffs and is ‘well positioned to navigate this near-term environment,’ according to the chief executive.
Over the medium term, Vorih is confident in Genuit out-performing the market ‘due to our strong exposure to sustainability-linked growth drivers’.
STEADY RATHER THAN STELLAR GROWTH
Genuit consists of three divisions: sustainable building solutions (around 40% of group revenue); climate management (30% of revenue) and water management (another 30% or so of revenue).
Sustainable building solutions is focused on domestic and commercial plumbing and drainage solutions, as well as building products such as injection-moulded plastic products for roofing, wall and floor ventilation, and valves for high-pressure industrial pipe systems.
Climate management is focused on reducing the carbon impact of heating and cooling systems in the home and the workplace, with products ranging from large-scale ventilation and cooling systems to heat recovery units, filtration units to ensure water quality in heating systems, and heat pumps and underfloor heating.
Water management is focused more on civil and infrastructure projects, covering surface water drainage, sewer systems, pressure systems, cable access and protection, and includes the original Polypipe business.
All three divisions grew their turnover by high single digits in the first four months of this year, highlights being new-build housing, more need for stormwater attenuation solutions due to dry Spring weather and increased demand for residential and commercial ventilation systems.
Management expect to be able to offset increased labour costs – due to the increase in NI contributions and the minimum wage – through productivity gains and cost management, and the Genuit Business System is expected to improve margins over the course of the year.
Meanwhile, thanks to its strong balance sheet, the firm continues to build a pipeline of potential bolt-on acquisitions to increase its market share and add new capabilities.
FUND MANAGERS SEE UPSIDE
Alex Wright, manager of UK-focused investment trust Fidelity Special Values (FSS), is a contrarian stock-picker with a tremendous track record which includes having beaten the Nasdaq over the last five years.
The trust takes a three-step approach to investing in companies which are undergoing structural change, and Genuit is a relatively new holding in the early, ‘beginning of change’ category.
‘There are numerous attractive opportunities in the current market, available at low valuations, and we continue to uncover compelling investment ideas, particularly in periods of high market volatility. We believe current market conditions continue to favour our contrarian-value investment style, and this is reflected in our increased exposure to domestically focused businesses, particularly within UK consumption,’ which include housing-related stocks like Genuit, says Wright.
Another fan of the stock is Charles Montanaro, manager of Montanaro UK Smaller Companies (MTU), who views it as a high-quality business with strong leadership and a growing ‘moat’.
‘Genuit offers an extensive portfolio of innovative solutions ranging from PVC drainage and plumbing pipes/products to low-carbon heating and cooling systems, clean and healthy air solutions and resilient surface water management – this means identifying ways to reduce the risk of flooding through diverting or managing water flows.
‘With a current UK market share of around 20% and exposure to long-term themes such as sustainable construction, water management and infrastructure investment, we believe this is more than a cyclical recovery story,’ says the manager.
With first-half results due on 12 August, and the price having drifted back from its post trading update high of 420p, we think this is a good time to start accumulating Genuit shares.
Assuming no change to earnings forecasts of 28.5p per share by December 2026, and a gentle re-rating towards its 10-year median valuation of 20 times, we reckon the shares could be trading at 570p or more than 50% higher than today within 18 months.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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