Luxfer (LXFR US) - Small and not too steep
Luxfer is a global materials technology company specialising in the design and manufacturing of gas cylinders and high- performance materials.
The firm employs 1 400 people, of which half are based in the US.
The company has two reportable segments, Gas Cylinders and Elektron.
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Aluminium gas cylinders account for about half of Luxfer's sales and have a diverse range of end users including medical gas storage, breathing apparatus, fire-fighting equipment, and alternative fuel tanks for trucks.
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Electron is Luxfer's magnesium business that also has a wide variety of end users.
Magnesium powders are used in military flares.
Their usage depends on the level of war activity and R&D programmes.
Lightweight magnesium alloys have been used in military aircraft components for years, as well as helicopter parts.
The company's materials have also approved for use in commercial aircraft seating.
Supplemental disclosure provides end market exposure to Transport (31% sales), Defence, First Responders and Healthcare (32%) and General Industrial (37%).
Financial considerations
Elektron is the largest contributor to revenue and profit for Luxfer. There are several near-term supportive themes for this business including:
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From 2014 demand for magnesium powder used in flares declined following a substantial destocking by NATO. NATO is now restocking, and the company would be a clear beneficiary of any increase in military activity.
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Elektron's lightweight magnesium alloys have recently gained approval for use in commercial aircraft.
While its products are currently being used mainly for non-structural items such as seating, there is a possibility that it could be included in structural components in future.
Peak seat sales could be worth $20 million per annum (5% of 2022 revenue) and potential structural demand is estimated at between $40 million and $60 million.
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Dissolving fracking products are currently generating $3 million to $5 million per year despite low exploration levels.
In a buoyant market the company estimates the revenue contribution could be ~ $20 million.
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Biotronik has made a bio-absorbable stent with Luxfer's medical grade product, which could be worth up to $10 million in profit per year.
Gas Cylinders is also a substantial business servicing a variety of industries:
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Demand for tanks historically came from new vehicles using LNG when oil was very expensive in comparison to natural gas from conversions.
In 2015, conversions largely stopped given that the oil price had fallen.
However, there may be a resumption in conversion demand given the recent high oil price levels and a push towards cleaner fuel alternatives.
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Future growth in cylinder demand is expected to come from hydrogen being used as a fuel.
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Emergency services breathing apparatus demand has now stabilised following some disruption in the last few years.
This market represents around 25% of total cylinder demand and is particularly profitable.
Under the previous CEO, Alok Mascara, the company incurred consistent restructuring charges, which are not expected to reoccur. This could be supportive of margins going forward.
Luxfer boasts modest debt levels with net debt to EBITDA currently at below 1 times.
Investment case
Luxfer is the global low-cost leader in manufacturing aluminium cylinders and is also a leading magnesium alloy and zirconium maker.
The firm is exposed to several encouraging trends, which should result in continued earnings growth that does not seem to be currently reflected in the share price.
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Light weighting - magnesium is a key component part in aerospace and activity in this space is still below pre-Covid levels.
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Clean energy - hydrogen offers a big opportunity and business doubled in 2021 versus 2020. The firm produces hydrogen tanks for trucks, rail, shipping, and airplanes. The industry is still in its infancy and could provide a longer-term tailwind for the company.
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Compressed Natural Gas (CNG) as a potential "cleaner" replacement fuel in transport - CNG is commonly referred to as a green fuel because of its lead and sulphur-free character and it reduces harmful emissions.
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Zirconium as a catalytic converter in automotive - increasing required levels of content are expected to continue.
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Health technology and safety - zirconium is used in smartphone screens, flameless ration heaters, chemical kits and flares, to name a few.
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Oil and gas (Solumag) - the American oil patch has not responded quickly to the uptick in oil prices - it has been challenging to get equipment and restart drilling.
Risks
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Share price momentum is downward and there is a chance that negative sentiment could be entrenched.
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Because of the share price level, there is a risk that the company could be taken over ”too cheaply”.
Consensus and Valuation
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Consensus is positive on Luxfer stock, with 67% of sell-side analysts maintaining a ”Buy” rating on the stock.
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Bullish sentiment has been consistent over the last 24 months.
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Consensus forecasts EPS growth of 22.1% y/y this year (adjusted +30.8%).
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On a relative basis, Luxfer trades at a substantial discount to its own history.
