- Disposal of subsidiary makes four times gross return in 42 months
- Increased profit guidance for medical and engineered pump divisions
The key reason I included engineering group Avingtrans (AVG: 315p) in my market-beating 2017 Bargain Shares portfolio (portfolio return of 123 per cent), was the directors' impressive track record of acquiring and turning around businesses before selling them on.
Chief executive Steve McQuillan and finance director Steven King have earned top marks again, disposing of Peterborough-based Peter Brotherhood, a specialist in the design, manufacture and servicing of performance-critical steam turbines, heat and power systems. Avingtrans acquired the business for £9.3m as part of the £52.7m acquisition of Hayward Tyler in September 2017. The £35m exit price represents a gross return of four times capital invested, seven times Peter Brotherhood’s net assets and 9.3 times pre-pandemic operating profit. The disposal moves the group to a forecast net cash position of £22m (70p a share) at the 31 May 2021 year-end.
The elimination of Peter Brotherhood’s contribution is neutral on 2021 and 2022 pre-tax profit (£7.4m and £8m) and earnings per share (EPS of 20.4p and 21.7p) estimates. That’s because management has guided analysts towards a higher contribution from the group’s engineered, pumps and motors (EPM) and medical divisions, which coupled with lower depreciation and interest charges, offsets the profit impact.
| Simon Thompson's 2017 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 03.02.17 (p) | Bid price on 16.03.21 (p) or exit price (see notes) | Dividends | Total return (%) |
| Kape Technologies (formerly Crossrider) | KAPE | 47.9 | 270 | 3.55 | 471.1 |
| BATM Advanced Communications (see note seven) | BVC | 19.25 | 98.8 | 0 | 451.0 |
| Chariot Oil & Gas (see note one) | CHAR | 8.29 | 9.18 | 0 | 250.4 |
| Avingtrans | AVG | 200 | 310 | 11 | 60.5 |
| 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 |
| H&T | HAT | 289.75 | 291 | 32.4 | 11.6 |
| Management Consulting Group (see note five) | MMC | 6.183 | 6 | 0 | -3.0 |
| Bowleven (see note four) | BLVN | 28.9 | 5.5 | 15 | -6.1 |
| Tiso Blackstar Group (see note six) | TBG | 55 | 20.4 | 0.54 | -61.8 |
| Average | 123.3 | ||||
| FTSE All-Share Total Return | 6485 | 7515 | 15.9 | ||
| FTSE AIM All-Share Total Return | 977 | 1386 | 41.9 | ||
| 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). Simon subsequently advised participating in the one-for-8 open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Total return reflects these transactions. | |||||
| 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). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and rates the shares a buy ('Ben Graham recovery plays', 5 October 2020). | |||||
| 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 at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019). | |||||
| 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 transferred its UK listing to the Johanesburg Stock Exchange. The shares were then delisted on 23 November 2020 when shareholders received an exit cash payment of R415 per share on cancellation of their shares. | |||||
| 7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) and subsequently bought back the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). | |||||
| Source: London Stock Exchange. | |||||
What has changed is the valuation as the £103m market capitalisation company is trading on an enterprise valuation of only 9.4 times 2021-22 operating profit estimates of £8.6m, and on price-to-book value parity. That’s far too low given the directors are working their magic on last year’s complementary acquisitions: Booth Industries, a Bolton-based designer and maker of fire doors, blast doors and wall systems; and Michigan-based Energy Steel, a maker of machined products to the civil nuclear power industry.
Avingtrans has also completed the acquisition of a majority stake in Magnetica, an Australian medtech and engineering company that specialises in next-generation MRI technologies. It has merged with Avingtrans' subsidiary SciMag – a UK-based business that designs, manufactures, tests and installs bespoke superconducting magnet systems – and US subsidiary Tecmag. It’s potentially transformational for the business to become a leading MRI systems integrator for a variety of niche markets around the world.
The holding has produced a total return of 60 per cent to date and I see further upside to my upgraded sum-of-the-parts valuation of 400p a share, the equivalent of a 2021-22 cash-adjusted price/earnings (PE) ratio of 15. Buy.
