Bargain shares: Priced for a highly profitable outcome

Engineering group Avingtrans (AVG: 403p) is bang on course to report growth in revenue and profit this year, albeit the first-half headline numbers mask the exciting growth prospects for all three divisions.

The reason why first-half revenue declined from £48.7mn to £45.1mn and cash profit was flat at £5.8mn was mainly due to the planned exit from third-party MRI component manufacturing. This led to a £3.6mn decline in medical and industrial imaging revenue.

Having acquired a majority stake in Magnetica, an Australian medtech and engineering company that specialises in next-generation MRI technologies, and merged that business with Avingtrans' subsidiary SciMag – a UK-based business that designs and manufactures bespoke superconducting magnet systems – and US subsidiary Tecmag, Avingtrans now controls a 60 per cent stake in a business that aims to produce compact, superconducting, helium-free MRI systems entirely in-house. The merger added complementary capabilities in system architecture, asymmetric magnet design, and gradient and radio frequency (RF) coil manufacture.

The addressable orthopaedic imaging market is worth around £400m annually, accounting for 10 per cent of the total MRI hardware and service market, with the veterinary segment another key target area. However, Magnetica 'pay per scan' business model could mean that the opportunity is far larger. That's because its orthopaedic MRI products will materially reduce the size and total costs of dedicated MRI systems, quadruple the scan rate, and free up capacity on the existing MRI system installed base, a major benefit to healthcare organisations. Magnetica is planning clinical testing of its MRI products in late 2022 ahead of launch at the end of 2023.

Bearing this in mind, Avingtrans has invested £4m for a strategic 11.9 per cent equity stake in Oxford-based Adaptix, a private company led by respected management (former Siemens) that recently launched a compact 3D X-ray system for orthopaedic and veterinary applications. The strategies of Magnetica and Adaptix are convergent, and there are material benefits to reap for both parties by combining their approaches to market in technology, software, and distribution channels.

The investment made in Avingtrans’ medical imaging business combined with the exit from third-party MRI manufacturing meant the division reported a £0.4mn operating loss on revenue of £0.8mn in the latest half year, down from a small profit of £0.1mn on revenue of £4.4mn. The investment is well worth making given the impressive track record of Avingtrans’ management team in building up and turning around businesses before exiting them at hefty profits. Last year’s £35mn exit from Peterborough-based Peter Brotherhood realised almost four times the group’s original capital investment in less than four years.

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). 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 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.

Booth Industries a prime candidate for disposal

Another turnaround is the 2019 acquisition of Booth Industries, a designer and maker of fire doors, blast doors and wall systems. Buoyed by a £36mn order to supply cross-tunnel doors for HS2, the Bolton-based company's record order book exceeds £50mn, thus underpinning expectations that it will earn a mid-teens cash profit margin on sales of £15mn this financial year. I can see Avingtrans’ monetising Booth’s order book by selling off this business in due course.

Booth’s strong performance was a major factor behind the 35 per cent hike in operating profit to £2.7mn in the group’s process solutions and rotating equipment division. It’s not the only reason as the 19 per cent rise in divisional revenue to £21.7mn also benefited from contract wins in the nuclear sector, including a scaling up of volumes of high integrity stainless steel storage boxes for Sellafield that store intermediate level waste retrieved from silos at legacy locations in Cumbria. The six-year contract is worth £70mn, up from £50mn previously, and will most likely rise again.

However, the big opportunity for the group’s Metalcraft subsidiary is the next phase of the Sellafield contract. It is likely to be worth more than £900mn when it goes out to tender in 2023. A successful tender would catapult the value of Metalcraft given the multi-year revenue and earnings visibility it would provide, so making the business ripe for disposal at that point.

Engineered pumps and motors division set to reverse first half decline

Admittedly, the group’s engineered pumps and motors division was held back by Covid-19 induced order delays in the first half, but chief executive Steve McQuillan and finance director Steven King noted during our results call that the unit has since built up order coverage. A $5mn nuclear sector order in Korea should be signed off shortly, and the group has also won a next generation nuclear contract in France worth $2m, with a further $2.5m of work to come. The directors report solid intake in the nuclear life extension market in North America, too, thus adding reassurance that the first-half £0.5mn dip in divisional operating profit to £1.9mn on revenue of £22.7mn will reverse in the second half.

Despite the hefty investments made, net cash of £22.7mn (71p a share) is only down slightly since the 2021 annual results, and the cash pile is likely to be boosted by around £11mn (35p) when surplus land at the Hayward Tyler Luton site is old. A purchaser is currently doing due diligence.

Source: London Stock Exchange, FTSE International, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at 12pm on 23 February 2022.

Unwarranted low rating

For the full year, broker finnCap expects operating profit to increase from £8.2mn to £8.5mn on modestly higher sales of £101m, rising to £9.6mn and £110mn, respectively, in the 2022/23 financial year. On this basis, expect earnings per share of 22.6p and 25.3p, respectively, to support dividends per share of 4.2p and 4.4p.

This means that the current year cash-adjusted price/earnings ratio of 14 could drop to 12 in 2022/23 after factoring in the sale of the Luton land, an incredibly low rating for a business that has multiple opportunities to realise hefty gains for shareholders through further exits (Booth Industries, Energy Steel, Metalcraft, and ultimately Hayward Tyler).

The holding has produced a 105 per cent total return since I included the shares in my 2017 Bargain Shares Portfolio, albeit the price has dipped 12 per cent since I covered the annual results (‘Bargain shares: Engineered for a profitable outcome’, 29 September 2021). My target price of 520p is conservative. 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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