Bargain shares: engineered for bumper gains

Shares in engineering group Avingtrans (AVG: 400p) have rallied 27 per cent to my 400p target price (‘Engineered for profitable gains’, 26 March 2021) and the holding is showing a 100 per cent gain in my 2017 Bargain Shares portfolio. The re-rating is warranted.

The group’s subsidiary Stainless Metalcraft has recently entered the second phase of the contract to provide high integrity stainless steel storage boxes for Sellafield. The three-metre cubed (3M3) box contract is worth up to £70m and represents a £20m uplift to the original contract awarded in 2015. The boxes will be used to store intermediate level waste retrieved from silos at legacy locations in Cumbria. Metalcraft will produce around 1,000 boxes over phase two of the programme, which is expected to take six years, with revenue being recognised evenly across the period.

Source: London Stock Exchange, FTSE International, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at 4.25pm on 28 June 2021.

Metalcraft has the only dedicated facility to supply boxes for intermediate level waste in the UK, so is in a leading position to tender for future contracts at Sellafield (over the duration the site decommissioning) and across a wider array of projects in the nuclear decommissioning sector.

The award is also supportive of profit guidance which points to annual pre-tax profit rising by 8 per cent to £8m on slightly higher revenue of £101m even though Avingtrans has sold Peterborough-based Peter Brotherhood, a business that was making pre-pandemic operating profit of £3.7m. Strip out net cash and Avingtrans is valued on a price/earnings (PE) ratio of 15.

However, chief executive Steve McQuillan and finance director Steven King have an enviable track record of identifying turnaround acquisition targets and then delivering huge returns for shareholders on exit, so a sum-of-the-parts valuation is a better approach.

Bearing this in mind, analyst Paul Hill of PMH Capital has arrived at fair value of 507p a share by applying 13 times operating multiple to Avingtrans engineered pumps and motor division (211p a share) and process solutions and rotating equipment division (195p); £11.8m valuation (37p a share) for its 59 per cent stake in  Magnetica, a specialist in next-generation MRI technologies; £11m (34p a share) for the disposal of surplus land at Luton; net cash of £21.2m (66p a share); and deducting central costs of £12.2m (38p a share).

Mr Hill also points out Avingtrans’ enterprise valuation to operating profit multiple of 12 times represents a 38 per cent discount to the average rating of 18 sector peers including Rotork (ROR), Weir (WEIR), Melrose Industries (MRO) and Hill & Smith (HILS). It’s a valid point, and I now feel the odds favour a re-rating to the 500p level, and perhaps beyond, as more investors reappraise the group’s revenue visibility. Buy. 

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.

■ 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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