Join our community of smart investors

Avingtrans posts major earnings beat

The designer, manufacturer and supplier of original equipment, systems and aftermarket services to the energy and medical sectors has smashed analysts forecasts out of the water
June 26, 2019

Avingtrans (AVG:255p), a designer, manufacturer and supplier of original equipment, systems and aftermarket services to the energy and medical sectors, has posted a major earnings beat for the 2018-19 financial year.

The directors now expect to report turnover of £104m (8 per cent ahead of analyst expectations), underlying operating profit of £5.8m (18 per cent ahead of expectations) and pre-tax profit £5.2m (21 per cent ahead of expectations). The company’s debt position is materially better, too, at £1.9m, reflecting the receipt of some contract payments earlier than expected and some capital expenditure delays.

Importantly, Avingtrans has seen a sustained improvement in the performance of the Hayward Tyler business, acquired in September 2017. Indeed, its engineered pumps and motors division has secured a number of key contracts, including a £10m contract with Vattenfall in Sweden for nuclear life extension equipment, won in February 2019, and over $6m (£4.8m) of orders to provide critical pumps and spare parts to nuclear reactors in the US and South Korea in April 2019.

Avingtrans continues to benefit from the integration of Hayward Tyler in other parts of the business. For example, Peter Brotherhood, a designer and manufacturer of performance-critical steam turbines, secured an order worth £10m in March 2019 to supply a Floating Production Vessel. Also, joint initiatives between Peter Brotherhood and Avingtrans’ Metalcraft business has resulted in a contract with a UK government agency worth £5m. Other large contracts have progressed positively, including further deliveries to Sellafield for the three-metre-cubed box production programme, relating to the storage of intermediate level nuclear waste.

Hayward Tyler currently has over 600 pumps in active service in nuclear applications across the world and a small acquisition made yesterday expands the company's nuclear capabilities and product lines for new and existing customers. Avingtrans made several other small acquisitions in the 2018-19 financial year, too, which underpin a step-change in revenue expectations for the 2019-20 financial year.

Not surprisingly, house broker finnCap has pushed through material earnings upgrades this morning and now expects Avingtrans’ revenues to rise by 31 per cent to £104m in the 12 months to the end of June 2019 to deliver a 117 per cent rise in adjusted pre-tax profit to £5.2m and 50 per cent-plus rise in earnings per share (EPS) to 12.7p. The bullish tone of the outlook is highly supportive of the company achieving finnCap’s forecasts for the new financial year, which point to revenues hitting £125m to deliver pre-tax profit of £6.1m and EPS of 15.1p. The dividend per share forecast is 3.8p and 4.1p, respectively.

On this basis, Avingtrans' shares are trading on forward price/earnings (PE) ratio of 17. The key is the scope for further operating margin improvement on rising sales, a real possibility in my view especially as aftermarket sales now account for half of all new orders, and there are operational synergies still coming through from the integration of Hayward Tyler. Moreover, the company’s enterprise value of £82m 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 seen the shares deliver a total return of 29 per cent since I included them in my market-beating 2017 Bargain Shares Portfolio, and last advised buying the shares, at 212p, earlier this year (Avingtrans delivers increasing profitability as profits soar, 27 Feb 2019), I am tweaking up my target price from 275p to 300p ahead of the annual results on 18 September 2019. Buy.

 

■ Stock clearance offer ends 15 July. Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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. 

Subject to stock availability, each book can be purchased at the promotional price of £9.95 per book plus £2.95 postage and packaging, or both books can be purchased for £19.90 plus postage and packaging of only £3.75. The books are being sold through no other source and are normally priced at £16.95 per book plus postage and packaging. A detailed outline of the content of each book can be viewed on YPDBooks website.