On the earnings beat

Avation now has 12 airline customers across nine countries of which Virgin Australia, Viajet and Philippines Airlines account for 60 per cent of its annualised revenues of £115m. In June 2015, the three largest clients made up 86 per cent of revenues. Other customers include easyJet, Air France and Thomas Cook, which have leased wide body Airbus A320 and A330 aircraft, a segment that accounts for a third of Avation’s portfolio of 37 planes. The benefit of diversification is to de-risk the client base, enhance visibility of future cash flow, and improve the company’s credit rating.Indeed, Aviation’s weighted average cost of debt has fallen by a chunky 30 basis points to 4.8 per cent since June 2017.

The short-term impact of the aircraft disposal is a loss of income in the financial year to end June 2018. Analyst John Cummins at brokerage WH Ireland predicts Avation’s pre-tax profits will dip from $21.4m to $18.2m on revenues of $108m in the 12 months to end June 2018. But that only tells half the story because at the end of the first half Avation leased out four aircraft worth a combined $286m to Philippines Airlines, Eva Air, and Mandarin Airlines. It also has three ATR turboprop aircraft on order for placement this year. The income from these new leases supports forecasts for second half pre-tax profits of $10.9m, up from $7.3m in the first half. Moreover, with the benefit of a further three aircraft placements in 2019, Mr Cummins expects pre-tax profits to lift off to $23.5m in the 2018/19 financial year based on revenues to $118.6m.

Finance director Richard Wolanski pointed out during our results call that the company has a further 30 options on ATR72 aircraft, a significant number in relation to its current fleet of 19 ATR72 planes and annual global production of 85 aircraft. If demand in China, Iran and India takes off as seems highly likely, then Avation's $1bn portfolio of planes and options is set to become even more valuable. Also, all bar two of the 30 options are held on the balance sheet at nil cost even though they could easily generate millions of dollars if traded on in what is a tight new build aircraft market.

So, with Avation's shares rated on a discount to book value of 332¢, or 240p, priced on less than 10 times 2018-19 EPS estimates of 33.8¢ (24.4p), and the 6¢ (4.3p) a share full-year payout likely to be raised again, I feel my 275p target price is fully justified. Please note that I first advised buying the shares at 159p ('Get on board for blue-sky gains', 11 September 2014), since when the company has paid out total dividends of 13.25¢ (10p) a share. Buy.

Chariot’s equity raise

Aim-traded Chariot Oil & Gas (CHAR:15.5p), an oil exploration company with activities in Morocco, Namibia and Brazil, is raising $21.1m (£15.1m) through a placing and open offer at 13p a share, primarily to drill a well at Prospect S in Namibia in the second half of this year. The field has an estimated gross mean prospective resource of 300m barrels net to Chariot, and a potential 1.4bn barrels net in other prospects within this licence.

Having captured the bottom of the seismic market, Chariot’s board has decided to accelerate drilling plans and take advantage of low prices in the rig market as the industry returns to exploration. Pre-emptive funding and firm drilling commitment would then enable the company to enter partnering discussions from a position of financial strength and at a commercial advantage. It's worth noting that oil giants oil giants TOTAL and ExxonMobil have both entered farm-in deals in Namibia since the autumn. In turn, this should maximise the retention of licence equity and ensure that its wells are drilled at the optimum point on the cost cycle. Chariot's 65 per cent share of drilling the Prospect S exploration well accounts for $15m of the $21m funds being raised.

Chariot also has a 10 per cent equity interest in the Rabat Deep permits, Morocco, which holds an estimated 768m barrels of gross mean prospective resource. The company has partnered with oil giants Woodside and Eni, recovering all back costs and securing a capped carry through drilling. Saipem 12000, a sixth-generation ultra-deepwater drillship, has already commenced its mobilisation to drill a well on the Rabat Deep permits. It should spud later this month.

I first advised buying Chariot’s shares at 8.29p in my 2017 Bargain Shares portfolio, top-sliced two-thirds of the holding at 17.5p ('Bargain Shares on a tear', 3 April 2017), and last advised running profits on the balance, at 22p, ahead of news of the Moroccan drilling (‘How the 2017 Bargain Shares portfolio fared’, 2 February 2018). The share price has since dropped to 15.5p on news of the fundraising, a harsh reaction given that it could easily double or more if either the Rabat Deep or Namibian permits hits pay dirt. In the circumstances, I would use some of the profits you banked last year to take up your allocations in the open offer, which is being made on the basis of one new share for every eight held at the record date of Friday 2 March. Take up.

Sylvania Platinum’s profit surge

Sylvania Platinum (SLP:16p), a fast-growing and low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium, has issued interim results bang in line with my expectations when I included the shares in my 2018 Bargain Shares portfolio.

The company has two lines of business: the re-treatment of PGM-rich chrome tailings material from mines in the North West Province; and the development of shallow mining operations and processing methods for low-cost PGM extraction. Its dump operations comprise seven active recovery plants that treat chrome tailings from mines across the western and eastern limbs of the Bushveld Igneous Complex. These businesses are doing rather well.

Buoyed by a near-20 per cent increase in the average basket price of $1,057 per PGM ounce, more than offsetting a $100 per ounce year-on-year rise in cash costs to $526 per ounce, Sylvania’s revenues surged by almost 15 per cent to $28.2m in the six months to end December 2017 to boost pre-tax profits by 19 per cent to $7.9m. There are decent trading prospects for the second half, too.

A relatively high Rhodium content in the PGM concentrate means that the company is benefiting from the 70 per cent surge in Rhodium prices in the past six months, and second-half production guidance is for between 37,000 to 41,000 ounces (oz) of PGM, up from 34,000 oz in the first half. So, with Sylvania’s enterprise value of £35m equating to a miserly 2.5 times annual cash profits, highly cash-generative operations and a debt-free balance sheet, I reiterate my buy advice.

Avingtrans on course

The shrewd management team at Aim-traded Avingtrans (AVG:230p), a maker of critical components and services to energy, medical and industrial sectors and a constituent of my 2017 Bargain Shares portfolio, has been working its magic on last autumn’s acquisition of heavily indebted specialist engineer Hayward Tyler, a supplier of motors and pumps to customers in the nuclear, power generation and oil and gas sectors. They have already made £2.5m of annualised cost savings by removing duplicated head-office costs, restructuring the business and through natural wastage, and a further £1m of savings in the supply chain.

This explains why analyst David Buxton at broking house FinnCap expects a sharp turnaround in Hayward Tyler’s performance, pencilling in a second-half operating profit of £2.4m, a marked improvement on the £1.1m loss in the first half to end-November 2017. There is substance to his forecasts as Hayward Tyler has profitable operations in Vermont, in the US. There it is a top-rated supplier to the nuclear industry, providing a new geographic location for Avingtrans, which has a strong position at Sellafield where it has a lucrative 10-year contract worth £47m to provide waste storage containers for the Cumbrian nuclear power station. It’s been winning new business too, including $10m-worth (£7.2m) of contracts from Korea Hydro & Nuclear Power since the autumn. Moreover, the full benefits of cost savings will be seen in the 2018-19 financial year, when Mr Buxton predicts Hayward Tyler can add an extra £2.3m in operating profit on annual sales of £64m. The US business will pay less tax too following the US government’s cuts in corporation tax rates.

The contribution from Hayward Tyler and a solid performance from Avingtrans’ existing businesses, which increased revenues by almost 15 per cent in the first half, mean that the company is on course to produce adjusted cash profits of £5.7m on revenues of £80m in the 12 months to end-May 2018 to lift pre-tax profits sevenfold to £2.2m. Moreover, after factoring in a sensible-looking 20 per cent hike in revenues in the 2018-19 financial year, and taking into account further efficiency gains, FinnCap predicts cash profits could hit £8.1m next financial year to deliver pre-tax profits of £3.8m, about £400,000 higher than previous estimates. In other words, expect EPS to more than double from 4p to 9p. Shareholders can also expect a full-year dividend per share of 3.6p, rising to 3.8p in the 2018-19 financial year.

So, with the energy division’s cash profit margins on the rise – finance director Stephen King revealed to me that he sees potential to target a mid-teens margin in the longer term – I feel that an enterprise valuation to cash profit multiple of 10 times, representing a 20 per cent discount to the sector average, is attractive. I have a target price of 275p. Buy.

Gresham House poised to ramp up profits

I had an informative results call with Tony Dalwood, chief executive of specialist asset manager Gresham House (GHE:410p), shares in which I suggested buying at 400p ahead of the announcement (‘Investment company watch’, 12 February 2018).

The key points to note are that the business turned profitable in the second half of 2017, driven by a £286m increase in assets under management (AUM) to £649m, of which £200m was organic growth and the balance from the recent acquisition of Hazel Capital, a leading UK manager of new energy infrastructure and two renewable energy VCTs. This meant that annualised management fee income run rate was £7.7m at the 2017 year-end, suggesting that Liberum Capital’s 2018 target of £8.55m of fee income could prove on the light side. That’s because the final close of the Gresham House Forestry Fund could add £30m to AUM this month, a €5m fundraising for one of the Hazel VCTs launches this week, and British Strategic Investment Fund (BSIF), a closed-ended Guernsey Limited Partnership, which invests in relatively illiquid investments in UK housing and infrastructure-related assets, could add £85m of AUM at final close later this year.

Given the operational gearing effect on profits of rising management fee income, I feel Liberum’s pre-tax profit estimate of £793,000 for 2018 is conservative, especially as the directors are looking to add further scale to the business by using its pro-forma cash pile of £12m to make acquisitions. Liberum’s predictions that pre-tax profits will more than double to £1.65m on fee income of £10m in 2019 are achievable, and look on the low side, too. My sum-of-the-parts valuation of 460p a share, which takes into account deferred payments on previous property disposals, net cash and listed shareholdings, could prove conservative. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies can be pre-ordered online at www.ypdbooks.com for the discounted price of £14.50, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. The book will be sold at its full price of £16.95 plus postage after 15 March. Simon has published an article highlighting the contents, 'Repeat buying opportunities', which can be read on the Investors Chronicle website.