Avingtrans set to bounce

For a small company, Avingtrans manages to divide investors' opinion sharply. Either it's an undervalued manufacturer with export potential, or a low-tech wealth destroyer. Which view prevails may depend on whether or not you exited close to the share price's peak at 243p back in 2007. Much has changed since then, and Avingtrans' prospects at least deserve a revised analysis in the light of good prospects for the UK's manufacturers in general.

Avingtrans' fall from grace was brutal. Its main problem was a series of unprofitable contracts that came with the acquisition of B&D Patterns, renamed Sigma. Its bosses say these problems have been solved with a major restructuring in 2010 and Avingtrans can again concentrate on boosting its profit margins, which, in the first half of 2010-11, were 28 per cent, up from 22 per cent the year before. High and rising margins are crucial as Avingtrans is not a company with high levels of intellectual property - it makes parts for more complicated machines assembled by other people - so it needs to squeeze as much profit out of its fixed cost base as possible.

In general, engineers are enjoying a second spring, with Avingtrans' biggest customers, such as Siemens, boosted by demand from China and other emerging markets for high-tech equipment. As well as exposure to Asia via trade with Germany, Avingtrans now has a Chinese subsidiary, Sigma China, which made a first-time, if modest, profit in the first half of 2010-11. It's a cautious start, but it could become a valuable toehold in a fast-growing market, and management expects to expand the company's capacity there this year.

The finances look stable enough. Debt is under control, but is unlikely to move lower as increased orders will tie up more working capital in stocks and debtors. That isn't necessarily a bad thing as it shows that order books are filling out. Currently, the main pressure is price inflation in the group's supply chain - steel and other raw materials have risen by an average of 10 per cent in the past year. It remains to be seen how far Avingtrans can pass on its higher costs to customers, but it should have some pricing flexibility. The other big issue is whether it can continue with its type of volume production in the UK. The company already has a set-up in China, perhaps in anticipation of relocating all of its manufacturing to lower-cost regions. But only time will tell whether this will pay off, or whether lower-cost rivals will be able to cherry-pick the company's contracts.