Avingtrans (AVG:245p), a designer, manufacturer and supplier of original equipment, systems and aftermarket services to the energy and medical sectors, announced a major earnings beat for the 2018-19 financial year ahead of the results when I raised my target price from 275p to 300p (‘Avingtrans posts major earnings beat’, 26 June 2019). Shareholders have been rewarded with a higher dividend (3.8p a share) for the eighth consecutive year.
In the event, the results were even better than house broker finnCap’s upgraded expectations. Avingtrans reported a 34 per cent rise in revenue to a record high of £105m, partly driven by acquisitions but also driven by 11 per cent organic growth. It’s a more profitable income stream, too, as operational improvements made meant that underlying pre-tax profit surged by 124 per cent to £5.3m, and adjusted earnings per share (EPS) increased by 76 per cent to 14.9p on a lower than expected tax charge. That was well ahead of finnCap’s 12.7p upgraded EPS forecasts in June. There is scope for outperformance in the new financial year, too.
Factoring in a combination of ongoing strong organic growth and the benefits of some small acquisitions, finnCap’s forecasts annual revenue of £125m (over 80 per cent is already covered by the order book) and a 17 per cent rise in pre-tax profit to £6.2m. On this basis, expect a near 11 per cent hike in EPS of 16.5p. However, Avingtrans has £35.4m of tax losses available from acquisitions made, and UK corporation tax rate will reduce to 17 per cent in April 2020. finnCap’s EPS estimate is looking conservative in my view.
Operationally, Avingtrans’ shrewd management team has driven a sustained improvement in the performance of the Hayward Tyler business, acquired in September 2017, which forms part of its engineered pumps and motors division. Finance director Stephen King told me during my results call that the unit, which accounts for almost half of group turnover, posted a 12.3 per cent cash profit margin and, with the benefit of further operational improvements, should lift margins into the 13 to 15 per cent range this year. The unit has secured a number of key contracts this year, including a £10m award with Vattenfall in Sweden for nuclear life extension equipment, and £4.8m of orders to provide critical pumps and spare parts to nuclear reactors in the US and South Korea.
It’s worth noting, too, that higher margin aftermarket sales are increasing as a proportion of the overall revenue mix (up from 42 to 45.5 per cent), a trend that is set to continue, and boosted by the small bolt-on acquisition of Energy Steel, a North American manufacturer of components for the civil nuclear power industry. The U.S.A. is the biggest civil nuclear market in the world, having 99 reactors that account for 30 per cent of the world’s nuclear electricity. Hayward Tyler has over 600 pumps in active service in nuclear applications globally, and the acquisition of Energy Steel expands the company’s product lines for both new and existing customers.
Avingtrans earned £9.4m of cash profit in the 2018/19 financial year which funded £1.1m of dividends, a £2.9m investment in capital expenditure, £400,000 in restructuring acquisitions, and a reduction in net debt from £7.1m to £2m. The proven track record of the board to identify turn round situations, improve their operational performance and then reward shareholders with hefty cash returns when they are sold is the main reason why I included the shares in my market-beating 2017 Bargain Shares Portfolio.
Priced on a substantial discount to analysts’ 335p a share sum-of-the-parts valuations, I maintain my positive stance with the shares rated on a prospective price/earnings (PE) ratio of 15, falling to a PE ratio of 12 in the 2020/21 financial year when finnCap predicts Avingtrans will make EPS of 20.3p. Buy.
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