The 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 market-beating 2017 Bargain Shares portfolio, have posted an earnings beat for the financial year to end-May 2018.
Adjusted pre-tax profits of £2.4m were 9 per cent ahead of house broker FinnCap’s estimate, producing EPS of 8.4p and supporting a full-year payout of 3.6p a share, the seventh consecutive year the dividend has increased. Underlying cash profits increased eightfold to £5.7m, reflecting a £5.1m maiden contribution from specialist engineer Hayward Tyler, a supplier of motors and pumps to customers in the nuclear, power generation and oil and gas sectors. That business was acquired 13 months ago in a distressed state, and Avingtrans' management led by chief executive Steve McQuillan and finance director Stephen King have worked their magic to restructure its operations to take out significant costs and make savings in the supply chain.
The company booked a £1.7m restructuring charge to do so, but it’s money well spent as Hayward Tyler’s cash profit margin of 9.5 per cent is poised to move into double digits given that £2.1m of annualised savings have been made. Importantly, end markets remain strong. Since the year-end, Hayward Tyler has landed two major contracts worth a combined £5.3m, one to design and make molten test pumps for advanced nuclear facilities in the US, the other to supply high-integrity pumps for the UK’s Astute class submarine programme.
Avingtrans’ other energy businesses are winning new orders too. For instance, Peterborough-based subsidiary Peter Brotherhood, a specialist in the design, manufacture and servicing of performance-critical steam turbines, compressors, and combined heat and power systems, won a £5m UK government contract over the summer, which should lead to “significant opportunities to tender for further business”.
The company will shortly ramp up its lucrative 10-year contract at the Sellafield nuclear power station, worth £47m, to provide 1,100 waste storage containers, highlighting its role in decommissioning work, which could provide a lucrative follow-on contract when tendering for the next stage (15,000 containers) commences next year.
With sales worth £39m in the order book due to be delivered in the current financial year, revenues of £22m booked in the first quarter to end August 2018, and a further £15m of sales set to come from the short order book, then almost 80 per cent of FinnCap’s current-year revenue estimate of £96m is already covered at this early stage. There are multiple tenders out to make up the balance. On this basis, expect cash profits to rise by more than half to £8.7m to lift pre-tax profit to £4.3m and produce earnings per share (EPS) of 10.5p to support a raised payout of 3.8p. Factor in net debt of £7.1m, and Avingtrans' enterprise value of £78m equates to only nine times cash profit estimates, falling to eight times 2020 forecasts.
In my book, that represents value – especially as the directors have successfully turned around businesses in the past and then exited to reward their shareholders. So, having last rated the shares a buy ahead of the financial results in the summer (‘Avingtrans material upgrades’, 2 July 2018), I continue to see upside to my 275p target price. Buy.
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