In an uncertain macroeconomic environment, it pays to seek out companies with robust order books and pricing power to mitigate the risk of a downturn in earnings. It also pays to back management who have a record of delivering over the economic cycle.
Avingtrans (AVG: 425p), a manufacturer of critical engineering components and services, fits the bill. The group generates its earnings from the following sectors: energy (31 per cent of revenue), industrial and defence (38 per cent), hydrocarbon (28 per cent) and medical (2 per cent). Exposure to highly regulated growth sectors support robust profit margins – gross margin increased from 30.4 to 34 per cent to deliver a cash profit margin of 12.7 per cent in the latest financial year – and offers defensive qualities too.
Moreover, improving sentiment in the nuclear, oil and gas sectors is manifesting itself through increased orders as highlighted by strong order intake at Vermont subsidiary for work on nuclear life extensions, $7mn of new orders from Korea Hydro & Nuclear Power, and a $4.1mn decommissioning contract with Nuclear Waste Partnership. It also helped drive operating profit at the group’s engineered pumps and motor division up by a fifth to £5.5mn on slightly higher revenue of £53.2mn.
Engineered for a profitable outcome
- Adjusted pre-tax profit of £8.2mn on annual revenue of £100mn
- Closing net cash of £16.7mn
- Dividend raised five per cent to 4.2p a share
Avingtrans’ management has proved adept at creating bumper returns for shareholders by acquiring, turning round and then exiting businesses, as highlighted by the disposal 18 months ago of Peter Brotherhood at a gross return of four times capital invested. The directors are working their magic once again.
The group’s process solutions and rotating equipment (PSRE) division delivered 23 per cent adjusted higher operating profit of £5.3mn on eight per cent higher revenue of £44.7mn, buoyed by a strong recovery and record order book at Boston-based Booth Industries, a designer and maker of fire doors, blast doors and wall systems. Having turned round the business following its acquisition in 2019, and subsequently secured a £32mn order to supply cross-tunnel doors for HS2 in 2021, the focus is now on increasing both aftermarket and overseas sales.
The PSRE unit also benefited from contract wins in the nuclear sector, including a ramp 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 contract is worth £70mn in revenue for the delivery of 1,000 boxes over the next six years, and the group’s Metalcraft subsidiary is well placed (as the only company to transition to phase two) in next year’s tender for the third phase – a potential contract worth £900mn.
True, higher investment in the group’s medical imaging business that specialises in next-generation helium-free MRI technologies for orthopaedic imaging systems will hold back profit growth ahead of product launch later in 2023. FinnCap is predicting slightly higher pre-tax profit of £8.6mn and EPS of 22.8p on revenue of £109mn in the 12 months to 31 May 2023. However, it’s well making the investment given that the addressable orthopaedic imaging market is worth around £400m a year, and Magnetica 'pay per scan' business model could mean that the opportunity is far larger.
Furthermore, Avingtrans’ net cash of £16.7mn (52p a share) is still expected to rise to £17.8mn by May 2023 even allowing for the higher investment in the medical business. The group’s £4mn investment in Oxford-based Adaptix (3D x-ray systems for orthopaedic and veterinary applications) is a potential share price catalyst, too, as the privately owned company has recently submitted a 510(k) pre-market notification with the Federal Drug Authority (FDA) for product approval in the US orthopaedic market.
The holding has produced a 119 per cent total return since I included the shares in my 2017 Bargain Shares Portfolio during which time the FTSE Aim All-Share Total Return index has declined 3.5 per cent, and the share price is up six per cent since the interim results (‘Priced for a highly profitable outcome’, 22 February 2022) in a market down 21 per cent.
Trading on a cash-adjusted price/earnings (PE) ratio of 16, and with potential for further exits to realise substantial shareholder value (Booth Industries, Energy Steel, Metalcraft, and ultimately Hayward Tyler), I maintain my 520p sum-of-the-parts valuation, which includes £11m (34p a share) for the surplus land at Luton. It's worth noting that 55 per cent of annual revenue is generated outside the UK, so the group is also a beneficiary of sterling weakness. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards
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