The UK's manufacturing sector has entered into a period of expansion in what promises to be an opportunistic time for those in the market for acquisitions.
Factories are increasing their production at the fastest rate since the mid-1990s according to a recent survey from CBI. This acceleration is expected to surge to a 40-year high in the months ahead as the UK continues to see strong production demand from both domestic and international markets.
In the most notable escalation of the past 20 years, the number of companies reporting soaring output outweighed those reporting falling demand by 31 per cent, up from 22 per cent in April.
Peter Hemington, partner at accountancy and business advisory firm BDO LLP, encouraged Chancellor Philip Hammond to increase investment in UK manufacturing in order to aid its ever-expanding productivity and growth potential. He added: “Amidst slowing growth in the economy as a whole, UK manufacturing is in a definite bright spot at the moment.”
One company already benefiting from this bright spot is Essex-based ventilation fan manufacturer Flakt Woods, whose latest accounts to the end of last year show a 10x boost in pre-tax profits.
Flakt Woods Ltd specialises in the development, manufacture and sale of fans for commercial and industrial applications. After being acquired by a private equity firm last year, the company generated a profit of £1.86m for the year ending 31 December as compared to the £149,000 as reported just a year before.
Their sudden profitability was attributed to significant sales growth and increased interest from international markets, as well as a flurry of new orders. To ride the wave of this new growth and keep up with surging demand, the company has since been reinvesting its profits into new product ranges and increased efficiency of its factories and supply chains.
And it's not just the physical operations that newly flush manufacturing companies are choosing to invest in – human capital is increasingly becoming a focus. In fact, the rate of job creation within the industry has risen at the fastest pace for 13 months as firms with increased cash flow seek to fill skills shortages with the hiring and training of staff.
According to a recent report from the UK’s premier business organisation, CBI, 28 per cent of the manufacturing firms surveyed revealed they intend to spend more on training and retraining over the next 12 months, compared to 25 per cent who will invest in product and process innovation.
“Output growth among UK manufacturers is the highest we’ve seen since the mid Nineties, prompting the strongest hiring spree we’ve seen in the last three years. Cost pressures are easing and firms are upbeat about the outlook for export orders,” said CBI’s chief economist, Rain Newton-Smith.
Interest from business buyers
As the market’s outlook improves, business buyers are increasingly catching onto the potential of the sector, as evidenced by a recent spate of related acquisitions. For example, the private investment group Cairngorm Capital has recently acquired Halifax-headquartered window manufacturer Polyframe in a deal that expands their operations considerably.
Speaking of the deal, John Lightowlers, the group managing director of the enlarged group, said: "There are great opportunities across the sector and as an enlarged group we look forward to meeting all trade customers' product needs."
West Bromwich manufacturer Berck are also making the most of the sector’s good fortunes. They’re currently looking to expand their manufacturing portfolio by targeting businesses in the defence and aerospace industries.
Their takeover of engineering rival Fourjay means they will now be able to supply vital fuses for Typhoon Eurofighter and F-16 combat jets, while also helping to modernise the latter’s manufacturing processes by introducing computer systems and the skills needed to operate them.
Rob Dobson, from information and analysis company Markit, said that "given the breadth of the [manufacturing sector’s] expansion" it was extremely likely that growth would be maintained for businesses both large and small.
"The survey data suggest that the manufacturing economy remains in good health despite Brexit uncertainty, and should help support on-going growth in the economy in the third quarter, which will add fuel to hawkish policymakers' calls for higher interest rates."
And it's certainly true that despite some months of political and economic uncertainty surrounding Brexit, data shows that the product market is well on its way to recovery. Production increased at the fastest pace for several months, with orders from abroad proving to be particularly robust.
In fact, the recent weakness of the pound has actually helped to push up demand for UK goods from overseas bargain hunters. The downside of this, of course, is that it has also raised the cost of imports and commodities for UK businesses but, overall, the negative effects of a fluctuating pound seem to have been levelled out by other factors. One of these factors has been the contracting services sector, which accounts for at least some of the manufacturing sector’s recent success.
According to BDO's Optimism Index, UK Manufacturers are expecting a flurry of business activity, with its sector Optimism Index climbing to 121.4, well above the long-term trend. While at the same time the services sector outlook for 2018 was less optimistic, falling from 0.1 to 99.5 in July, below the long-term trend but still just edging it into growth territory, demonstrating that it's the services sector that has been most affected by the EU referendum while products and manufacturing remain hardy.
The continuing recovery of the UK’s manufacturing sector is an encouraging development for the health and restoration of an embattled economy, and offers a lifeline to returning the UK’s business output to growth. As the growth is expected to continue well into next year and beyond, all indications suggest that now is the ideal time for buyers to make their mark on the sector and invest in the future of both manufacturing and the UK economy.
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