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Bargain Shares: Engineered for a profitable outcome

A manufacturer of original equipment, systems and after-market services to the energy and medical sectors has a robust order book, and hidden balance sheet value.
Bargain Shares: Engineered for a profitable outcome
  • Operating profit surges from £3.2m to £8.2m on 7 per cent higher revenue of £98.5m in 12 months to 31 May 2021.
  • March 2021 disposal of Peter Brotherhood generates gross return of four times capital invested.
  • Current order book covers 84 per cent of 2021/22 revenue estimate of £101m, and 40 per cent of 2022/23 forecast revenue.

Engineering group Avingtrans (AVG: 460p) is reaping the upside from the strong turnaround of two previously loss-making acquisitions made in the summer of 2019: 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.

Both businesses are complementary to the rest of the group’s activities, which are mainly focused on designing, manufacturing and supplying original equipment, systems and after-market services to the energy and medical sectors. Both are now profitable as the benefits of restructuring and investment pays off. New contract wins are playing a major part, too. For instance, Booth’s record order book of £70m includes a multi-year contract worth £36m to supply cross-tunnel doors for HS2. Excluding this award, Booth’s order book is still 50 per cent higher than six months ago, says chief executive Steve McQuillan.

Moreover, the business is now generating a double-digit cash profit margin on current year forecast revenue of £12m, says finance director Stephen King, a very healthy return on the £2m purchase price. I would not be surprised to see the business being sold for £10m or perhaps more in due course, in keeping with the group strategy of realising shareholder value from acquisitions once they have been turned around. Energy Steel’s profit recovery has lagged that of Booth, but the business has still been reaping supply chain savings, and cross-selling opportunities with the Vermont based nuclear business that Avingtrans acquired as part of the Hayward Tyler acquisition in 2017. 

Prospects for the year ahead are solid, underpinned by a raft of contract wins in the nuclear sector including a £2.5m award to repair and upgrade remotely monitored valves at Sellafield. This is in addition to the contract extension (from £50m to £70m) to provide high integrity stainless steel storage boxes for Sellafield. The three-metre cubed (3M3) boxes are being used to store intermediate level waste retrieved from silos at legacy locations in Cumbria. Revenue will be spread evenly across the six-year contract, adding visibility to the group order book.

Simon Thompson's 2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 03.02.17 (p)Bid price on 29.09.21 (p) or exit price (see notes)DividendsTotal return (%)
Kape Technologies (formerly Crossrider)KAPE47.94123.55767.5
BATM Advanced Communications (see note seven)BVC19.25900402.0
Avingtrans AVG20045011130.5
Chariot Oil & Gas (see note one)CHAR8.296.400111.2
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
H&T HAT289.7529643.917.3
Management Consulting Group (see note five)MMC6.18360-3.0
Bowleven (see note four)BLVN28.95.515-6.1
Tiso Blackstar Group (see note six)TBG5520.40.54-61.8
Average    141.7
FTSE All-Share Total Return  64858038 23.9
FTSE AIM All-Share Total Return 9771453 48.7

1. Simon Thompson advised selling two-thirds of the Chariot 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). Simon then advised taking up the one-for-six opern offer at 5.5p ('Exploiting margins of safety', 1 June 2021). 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.

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.

Having sold Peterborough-based Peter Brotherhood for £35m (net proceeds of £30.6m) in March 2021, representing seven times net assets and 9.3 times pre-pandemic operating profit, Avingtrans currently has net cash of £23.3m (72p a share). The cash pile is set to rise further as negotiations are ongoing to sell surplus land at the former Hayward Tyler site at Luton which has planning consent for 1,000 new homes. Analysts believe the site could be sold for around £11m in the current financial year.

Based on house broker finnCap’s current year operating profit estimate of £8.5m, the shares are priced on an enterprise valuation to operating profit multiple of 14.5, a 20 per cent discount to the average rating of peers and that’s before factoring in the release of the hidden balance sheet value from the Luton land sale. A 4p a share dividend adds to the attraction.

The holding has produced a 130 per cent total return on my 2017 Bargain Shares portfolio entry point, and the shares are up 15 per cent since my last article (‘Bargain Shares: Engineered for bumper gains’, 28 June 2021). I raise my target price from 500p to 520p. 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].

October Promotion: Subject to stock availability, the books can be purchased for the promotional price of £10 each plus £3.25 postage and packaging, or £20 for both books plus £3.95 postage and packaging

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.