The company’s Maloney Metalcraft subsidiary has secured a contract with EDF Energy, worth £3.5m, to supply components for their current fleet of seven nuclear power stations across the UK. Maloney Metalcraft will supply gas-cooling process-critical valves for each of the seven EDF managed Advanced Gas-Cooled Reactors around the country (Dungeness B, Hinkley Point B, Hunterson B, Hartlepool, Heysham 1, Heysham 2 and Torness). The contract is part of a life extension programme that will also see Maloney Metalcraft providing engineering support and on-site services to EDF Energy as part of the deal. The contracts will continue until the end of life of the stations.
The Maloney Metalcraft team designed and supplied the original Carbon Dioxide gas drying systems for the stations back in the 1970s but, with further delays to the Hinkley Point C programme, extending the life of these older nuclear power stations has become critical to keeping the lights on across the UK. Moreover, the latest award gives further weight to the board’s decision to invest in the energy and medical business and, specifically, to strengthen Maloney Metalcraft's position in this market.
It’s not the only deal that underpins future prospects as Avingtrans’ Stainless Metalcraft subsidiary has a 10-year contract with Sellafield, worth £47m, to provide waste storage containers for the Cumbrian nuclear power station. Phase one of the project is worth between £5m and £8m over a two to three year period and covers the set-up and development of a production facility for nuclear waste storage containers. During the second phase, the facility will produce 1,100 of these three-meter-cubed storage waste containers over a period of seven years. It was a landmark contract for Metalcraft and Avingtrans’ management rightly describe the potential for the company in nuclear decommissioning as “a cracking opportunity”.
Importantly, this opportunity is being underpriced by the market, a point I made when I initiated coverage on the shares at 170p at the end of June (‘Engineering a profitable free ride’, 30 Jun 2016). That’s because following the sale of its aerospace business for £65m earlier this year, the company has net cash on its balance sheet of almost £48m, a sum worth 173p a share, of which it intends to return £28m to shareholders, or 100p a share. Details of the capital return will be announced alongside full-year results in September and will bring into focus the anomalous valuation here.
Significantly undervalued
To put this into some perspective, after stripping out net cash from the current market value of £52.8m, the company’s energy and medical division is in effect being valued at only 17p a share, or £4.8m, hardly an exacting valuation given that analyst David Buxton at brokerage finnCap expects this business to make pre-tax profit of £300,000 on revenues of £24.3m in the 12 months to end May 2017, rising to pre-tax profits of £1.4m on revenues of £31.1m the following year when the Sellafield contract really kicks in. This means that the medical business is in effect being priced on little over three times profits. I would also point out once you strip out the cash pile, the retained businesses have a net asset value of around 60p a share, so are in effect being valued on less than 30 per cent of book value.
The fact that Avingtrans is forecast to book a profit on disposal of around £27m on the sale of its aerospace division, in addition to a post tax profit on discontinued operations of £2.6m in its full year accounts to end May 2016, is evidence enough of the significant value its management team have created here. That track record is clearly at odds with the low valuation being attributed to the medical and energy division. The current market capitalisation also attributes little value whatsoever to the ability of Avingtrans’ skilled management team to replicate their success in building up and selling off an aerospace business by building up an equally successful medical and energy division. The £20m cash retained gives them ample firepower to do so.
Ahead of the full-year results next month, and the release of the circular outlining details of the hefty cash return, I continue to rate Avingtrans’ shares a cracking buy at 190p and maintain a target price of 230p a share. Buy.
