Staying calm and carrying on

So, unless you believe that we are in a bear market – and I don’t for the record – then drip feeding cash into quality companies at bargain basement prices during this correction period is likely to result in a favourable outcome. Indeed, when investors acknowledge that Armageddon can be avoided, the heightened risk premium currently embedded in asset prices will ebb away and support a strong rally.

Avingtrans’ acquisitions pay off

Avingtrans (AVG:270p), a designer, manufacturer and supplier of original equipment, systems and aftermarket services to the energy and medical sectors increased first half underlying pre-tax profits modestly to £1.7m on 15 per cent higher revenue of £55m. But drill through the numbers and it’s clear to me that the business is on target to deliver a 13 per cent rise in full-year pre-tax profit to £6m on revenue of £125m and a double-digit increase in earnings per share (EPS) to 16.5p.

The reason for the modest rise in first half profits is because Avingtrans’ management team, led by chief executive Steve McQuillan and finance director Steven King who have an enviable track record of acquiring and turning round loss making businesses before selling them on, made two acquisitions last summer: Booth Industries, a Bolton-based designer and maker of fire doors, blast doors and wall systems; and Michigan-based Energy Steel, a manufacturer of machined products to the civil nuclear power industry. The two businesses incurred a combined pre-tax loss of £900,000 in the first half. Strip this out and Avingtrans like-for-like first-half pre-tax profits actually increased by more than half.

Moreover, guidance from the directors points towards Booth Industries breaking even for the full-year and Energy Steel reporting a second half profit. So, without a second half profit drag, and given Avingtrans’ high margin aftermarket sales account for half the sales mix, then finnCap’s profit forecast looks achievable to me. Mr King noted that more than 95 per cent of the £125m revenue estimate is already contracted, thus mitigating risk. He also pointed out that £74m of the broker’s £135m revenue estimate for the 2020/21 financial year is already contracted, well ahead of the £50m contracted order book at this stage last year.

Booth Industries, which was bought out of administration for £1.8m in June 2019, is trading ahead of internal budgets, having secured £17m of new orders, completed a restructuring to eliminate surplus leased space, and been given £1.9m of working capital to fund the business. Energy Steel, a custom fabricator specialising in Original Equipment Manufacturers (OEM) parts obsolescence, product refurbishment and engineered design solutions for the US nuclear industry, is reaping supply chain savings, and benefiting from cross-selling opportunities with the Vermont based nuclear business that Avingtrans acquired as part of the Hayward Tyler acquisition in 2017. Hayward Tyler has over 600 pumps in active service in nuclear applications globally, and the US generates 30 per cent of the world’s nuclear electricity from its 99 reactors.

The holding has outperformed the FTSE Aim All-Share index by 36.5 per cent since I included the company in my market-beating 2017 Bargain Shares Portfolio, and is also up 10 per cent since my last article (‘Avingtrans posts another earnings beat,19 September 2019). Please note that the Coronavirus outbreak has had minimal impact on the company as less than 10 per cent of output comes from its facilities in China, and these are fully operational.

On a deep discount to a 335p a share sum-of-the-parts valuation, on a prospective price/earnings (PE) ratio of 13 based on finnCap’s EPS forecast of 20.3p for the 2020/21 financial year, the retreat from this year’s record high of 334p is a buying opportunity.

Sylvania’s mind-blowing earnings upgrades

I suggested buying shares in Sylvania Platinum (SLP:54.5p), a cash-rich, fast-growing, low-cost South African producer and developer of platinum, palladium and rhodium, ahead of the £154m market capitalisation company’s interim results and earnings upgrades (‘Exploiting market anomalies’, 10 February 2020). The scale of them is mind blowing.

Liberum Capital's net profit forecast for 12 months to 30 June 2020 is US$59m (£45m), or US$40m more than the house broker was forecasting last September; its net cash estimate of US$59m (16p a share) is US$9m more than I predicted in my February article, and is almost treble the US$21m cash pile in June 2019; and dividend per share estimates of 15.3¢ (11.8p) for the 2019/20 financial year, rising to 20.8¢ (16p) the year after, equate to 56 per cent of the current share price. Strip out the cash pile, and Sylvania’s shares are valued on 2.4 times Liberum’s current year EPS forecasts of 21¢ (16p), falling to 1.2 times the broker’s 2020/21 EPS estimate of 26¢ (20p) after adjusting for June 2021 estimated net cash of $111m (30p a share).

Aim-traded shares have almost quadrupled in value since I included them, at 14.5p, in my market-beating 2018 Bargain Shares portfolio. Offering 65 per cent further upside to my new target price of 90p, last week’s pull-back is a buying opportunity.

Avation’s value proposition undervalued

Interim results from aircraft leasing company Avation (AVAP:270p) make for an interesting read.

Firstly, the board has quantified the hidden value in the company’s balance sheet. Avation owns 22 ATR 72-600s and six ATR 75-500s, has six more ATR 72-600s on order for delivery through to 2022, and has options over 25 of these turboprop aircraft. The options had been held on the balance sheet at nil cost, but have been marked to fair value. The unrealised US$37m (£29m) gain on aircraft purchasing rights helped lift NAV to an all-time high of US$269m, or 429¢ per share (333p), and explains why first half pre-tax profits more than trebled to US$45.2m.

Secondly, the company is in preliminary bid discussions (‘A bid target set to take off’, 13 January 2020) and the directors believe that “Avation’s value is above the company’s NAV”. I agree the £1.1bn book value of its 49 aircraft is conservative, as highlighted by fact that two narrow-body aircraft were sold at a 10 per cent premium to their carrying last year. Also, the low corporate tax Singapore domicile, diversification and scale benefits to existing industry players, and potential for a larger entity to refinance Avation’s debt at a lower cost, all support a bid premium.

The holding has produced a total return of 82 per cent since I first advised buying the shares ('Get on board for blue-sky gains', 11 September 2014). On an unwarranted 19 per cent discount to NAV, the pullback from January’s record high of 333p is a buying opportunity.

Alpha delivering Alpha

Alpha Real Trust (ARTL:196p), a £117m market capitalisation company that invests in high-yielding property and asset-backed debt and equity investments, is delivering the ramp up in its commercial property lending activities (‘Delivering Alpha’, 27 January 2020).

The company has committed £57m across 41 high-yielding secured senior debt and mezzanine finance loans, of which £48m (equating to 39.4 per cent of Alpha’s £122m investment portfolio) was drawn down at the 2019 year-end, up from £22.8m 12 months earlier. The returns from this high return business line explain why Alpha’s latest quarterly EPS surged 60 per cent to 4.8p. Cash of £34.9m and £4.5m due from the sale of Alpha's Armouries development site in Birmingham provide the capital to continue scaling up this activity.

Also, a successful court ruling in the Supreme Court in India improves prospects for a windfall gain on Alpha’s investment in the Galaxia project, an 11.2 acre development located in an established suburb of Delhi, India. Having initiated arbitration proceedings against its development partner Logix in order to protect its investment, Logix has been ordered to pay Alpha £3.1m within three months, and a further £6m within eight months. Alpha has a charge over the site and a buyer is willing to pay £6m for it. Alpha has charges over the residences of the directors of Logix, too. The Galaxia investment is only valued at £2.5m in Alpha’s accounts, so if £9.1m is recovered then it would add 11p a share to NAV per share of 213p.

The holding has produced a total return of 158 per cent since I first advised buying at 80p ('High-yield property play', 10 February 2016) and I can see further upside potential. Buy.

Lock into a high yield undervalued REIT

The investment risk is skewed to the upside for investors in the high yielding shares of Alternative Income REIT (AIRE:71.5p).

The company’s investment objective is to generate a secure and predictable income return through investment in a diversified portfolio of UK properties, predominately in alternative and specialist sectors. AIRE invests almost entirely in freehold or long leasehold property (leases in excess of 100 years) and mainly in non-traditional sectors (a minimum of 70 per cent of the portfolio) including care homes, hotels and serviced apartments, student housing, nurseries, automotive (car showrooms and petrol stations), car parks, and even small power stations. Tenants include budget hotel chains Travelodge and Premier Inn Hotels, and motoring groups Motorpoint and Volkswagen Group.

Around 92 per cent of passing rent is derived from leases which have rent reviews linked to inflation. The breakdown is 71 per cent linked to the Retail Price Index, 21 per cent linked to the Consumer Price Index and 8 per cent is subject to open market value reviews. The inflation-linked weighting is supportive of rental growth, and the ability of the board to pay out a sustainable dividend of 5.5p a share to shareholders. Importantly, the directors have announced alongside the interim results that the dividend will be fully cash covered in the financial year to 30 June 2021, having reduced AIRE's recurring annual overhead costs to half their historic level.

The board has also appointed a new investment manager, Mason Owen and Partners, to manage the portfolio of 19 properties which are valued at £113m, having previously served a 12 month contract termination notice on investment manager AEW UK Investment Management after a tenant went into administration in April 2019. The industrial property was subsequently leased out the following  month to a new tenant, albeit with a 12-month rent free period which ends on 24 June 2020.

Investors have been rightly cautious since then especially as the company only listed its shares on the premium segment of the London Stock Exchange in June 2017, so has a short track record. But with overheads cut, and the rent free period coming to an end, there is an opportunity to lock into a secure dividend yield of 7.8 per cent and benefit from the expertise of Mason Owen. The manager works with the likes of Lxi REIT (LXI), LondonMetric Property (LMP) and Assura (Agr), companies which are rated on hefty share price premiums to net asset value (NAV).

That’s worth bearing in mind given that AIRE's share price trades 23 per cent below EPRA NAV of 94.63p even though the company has a modestly geared balance sheet (36 per cent loan-to-value ratio), 100 per cent occupancy rate and a weighted average unexpired lease term of 20 years to the next break.

Having advised buying the shares just above the current price in my October 2019 Alpha Report when the company was formerly known as AEW UK Long Lease REIT, I feel that the share price discount to NAV should narrow markedly in the coming year to complement returns from four quarterly dividends of 1.375p a share. Buy.

■ 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. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.