When I included Avingtrans (AVG:212p), a maker of critical components and services to energy, medical and industrial sectors in my 2017 Bargain Shares Portfolio the selection was primarily based on the impressive track record of the board and their ability to deliver hefty shareholder returns by acquiring, turning around and then exiting businesses.
The directors have been mightily successful to date, having sold off the company’s industrial division, Jenatec, to Kuroda of Japan for £13.75m in 2012, and its aerospace unit for £65m in March 2016 to book a hefty pre-tax profit of £27.5m. The next takeover target they settled on was former Aim-traded specialist engineer Hayward Tyler, a highly leveraged supplier of motors and pumps to customers in the nuclear, power generation and oil and gas sector, that was financially distressed and had a bloated cost base when Avingtrans acquired the business 18 months ago. It was ripe for Avingtrans management team to restore profitability by taking out costs from the business, improving the supply chain management and removing duplicated overheads.
Today’s interim results highlight just how successful they have been. Avingtrans underlying cash profit more than trebled to £3.6m on revenues up more than £20m to £47.7m to deliver adjusted operating profit of £1.9m. Organic revenues growth of 11 per cent highlights this is not just an acquisitive growth story. Please note that the non-cash depreciation and amortisation charges of £1.7m explains the difference between the cash and operating profit lines.
The engineered pumps and motor segment, of which Hayward Tyler forms the main part now, delivered £2.5m cash profit on a margin of 11 per cent in the latest six-month trading period, highlighting the restructuring efforts that turned around a previously loss making operation. Finance director Stephen King is targeting a mid-teens margin for this division in the medium-term. Moreover, the revitalised business has been winning a raft of new contracts, the most recent being a £10m award from power company Vattenfall in Sweden to provide critical parts and components to the Reactor Internal Pumps installed at the Forsmark nuclear reactors.
It’s not the only major contract award as Hayward Tyler’s US operation, based in Vermont, is a top-rated supplier to the nuclear industry. It expanded the company’s geographic reach and more importantly has also been winning contracts. Closer to home, Avingtrans has a strong position at Sellafield too where it has a lucrative 10-year contract worth £47m to provide 1,100 waste storage containers, highlighting its active role in decommissioning work, which could provide a lucrative follow-on contract when tendering for the next stage (15,000 containers) commences in the second half of this year. Chief executive Steve McQuillan says the total follow-on contract is likely to be worth £1bn spread across three or four suppliers, implying a £250m sales opportunity for Avingtrans if it is successful in its tender.
A bumper order book supports another step change in Avingtrans profits for the full-year with analyst David Buxton at broking house finnCap predicting 22 per cent higher revenues of £97m in the 12 months to end May 2019, of which half was booked in the first half, to deliver cash profits of £8.6m and a 75 per cent rise in operating profit to £4.9m. On this basis, expect annual pre-tax profit of £4.3m and a 24 per cent hike in EPS to 10.4p. Shareholders are rightly being rewarded and are on course for their ninth successive year of dividend growth with analysts predicting a full-year payout of 3.8p a share.
These positive trends are set to continue as margins build further. Indeed, following a post results earnings upgrade on the back of a £10m contract win for specialist turbine business Peter Brotherhood, finnCap believes that Avingtrans can deliver more than £10m of cash profit and £6.2m of operating profit on revenue of £110m in the 2019/20 financial year. The company has already booked half of next year’s sales even at this early stage. This implies EPS rising to 14.2p to support a dividend per share of 4.1p. Importantly, current net debt of £7.1m equates to just over 10 per cent of shareholders funds, so gearing is very modest, thus enabling Avingtrans to seek out further small selective bolt-on acquisitions as the directors have been doing.
| 2017 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 03.02.17 (p) | Latest bid price on 26.02.19 (p) | Dividends | Total return (%) |
| BATM Advanced Communications (see note seven) | BVC | 19.25 | 47.2 | 0 | 152.1 |
| Kape Technologies (formerly Crossrider) | KAPE | 47.9 | 109 | 3.55 | 135.0 |
| Chariot Oil & Gas (see note one) | CHAR | 8.29 | 2.6 | 0 | 42.6 |
| Cenkos Securities (see note two) | CNKS | 88.425 | 106 | 9.5 | 30.6 |
| Manchester & London Investment Trust (see note three) | MNL | 291.65 | 377 | 3.0 | 28.4 |
| Bowleven (see note four) | BLVN | 28.9 | 15 | 15 | 10.3 |
| Avingtrans | AVG | 200 | 210 | 5.8 | 7.9 |
| H&T | HAT | 289.75 | 282 | 15.8 | 2.8 |
| Management Consulting Group (see note five) | MMC | 6.183 | 6 | 0 | -3.0 |
| Tiso Blackstar Group (see note six) | TBG | 55 | 17.9 | 0.54 | -66.6 |
| Average | 34.0 | ||||
| FTSE All-Share Total Return | 6485 | 7064 | 8.9 | ||
| FTSE AIM All-Share Total Return | 977 | 1025 | 4.9 | ||
| Notes: 1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Return reflects the profit booked on this sale. Simon subsequently advised using some of the proceeds from the share sale to participate in the one-for-8 open offer at 13p a share in March 2018 which is taken into account in the total return ('On the earnings beat', 5 Mar 2018). 2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). 3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price. 4. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale. 5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price. 6. Tiso Blackstar has transferred its UK listing to the Johannesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates. 7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p, and running the balance for free ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) Source: London Stock Exchange share prices | |||||
Indeed, the £135,000 acquisition of Ormandy, a company that designs, manufactures and services off-site plant, heat exchangers and other heating, ventilation and air conditioning products has proved a bargain buy 12 months ago. It’s already profitable following site rationalisation and slimming down the workforce. It is winning new business too as the benefits of Avingtrans investment in sales and working capital pays off. The directors informed me during our results call today that they will ultimately be looking for an exit at a level of between 10 to 15 times the capital invested, implying a potential £10m exit. This possibility is certainly not being reflected in the current market capitalisation with the shares trading in line with book value.
Moreover, the company’s enterprise value of £75m equates to 7.5 times cash profit estimates for the 2019/20 financial year and 12 times operating profit estimates, a valuation that fails to take into account the value that is being created for shareholders from Avingtrans' other business units, nor the positioning of the company to higher margin aftermarket sales.
So, having last advised buying the shares at 230p in the autumn (‘Avingtrans earnings beat’, 3 October 2019), since when the company has paid out a final dividend per share of 2.3p but excluding the forthcoming raised interim dividend of 1.4p, I maintain my 275p target price.
Please note that this article was first published on Wednesday, 27 February and republished on Monday, 4 March to take into account news of the £10m post results contract win for Peter Brotherhood.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
