Below the radar: Airea’s recovery prospects look undervalued

As one of the UK’s leading manufacturers and distributors of contract carpets and carpet tiles under its Burmatex brand, the last few years haven’t been easy for Airea (AIEA).Follow | AIEA

First Brexit disrupted its export channels to its customers in the European Union. Then Covid impacted the company’s ability to trade, the effects of which have lingered as a result of uncertain demand from its core commercial refurbishment and new build customers. And finally the Ukraine crisis exacerbated ongoing supply chain difficulties, which has meant tight supplies of raw materials and higher input costs, not least spiking energy bills. 

It's credit to the company that it’s emerged from this with its finances very much intact, despite several years of falling sales and profits. Sensibly, the company decided to prioritise shoring up its balance sheet in 2020 - as it put it at the time, cash and working capital “provide the best defence against uncertainty”. 

Since then, it’s been reducing its gross borrowings, which alongside a healthy cash pile saw it exit 2022 with net cash of £2.8m. That was also boosted by the conversion of more than 100% of its operating profits into cash, a sign of a very efficient business.  

Demand is recovering towards pre-pandemic levels, too, thanks to returning customers in the UK and the identification of new export opportunities. Sales rose 16.5% to £18.5m, which alongside efforts to optimise supply chains and input costs – and pass some on to customers – meant pre-tax profits climbed 11% to £1.4m. Returns on net operating assets rose to 8.3%, from 6.7% in 2021, and working capital-to-sales fell 5 percentage points to 52.8%, reflecting improving efficiencies.

At the same time, Airea’s been able to keep investing in new products, most recently launching its first carbon neutral range, arctic, and refreshing ranges under its newly launched sustainability principles, eco2matters. That matters, because commercial landlords are under ever-growing pressure from their tenants to offer high-quality space that adheres to Net Zero targets. 

Airea’s shares have recovered strongly this year, up 50% over the last 12 months to reach the current 39p. That leaves them trading on a trailing PE of 11.6, which arguably undervalues the well-managed company’s recovery prospects – sales remain a third below pre-pandemic levels, when reported earnings per share were over 8p.

With no analysts covering the stock, it seems the market hasn’t yet spotted this potential.