- First-half pre-tax profit up 10 per cent to £4.4mn
- 95 per cent order book coverage of full-year revenue
- Robust performance from engineering systems business
- Medical imaging division gears up from product sales
First-half results from Avingtrans (AVG: 360p), a maker of critical engineering components and services, highlight the chronic undervaluation of the group.
Buoyed by a robust order book that covers 95 per cent of full-year revenue estimates, Avingtrans' advanced engineering systems (AES) division increased operating profit by 22 per cent to £5.5mn on revenue up a third to £63.7mn. New contracts include a $10mn order from TerraPower to design and develop the heat pumps that circulate the liquid sodium and transfer the coolant in TerraPower’s Natrium reactor. The nuclear segment continues to enjoy strong aftermarket sales, notably in the US and China.
In the UK, Avingtrans’ Metalcraft subsidiary has been awarded £14.5mn of additional nuclear decommissioning work, including its first contract with Magnox, and is ramping up nuclear decommissioning work at Sellafield. Avingtrans is well placed ahead of the 2025 tender process for the £900mn contract on the follow-on phase of that project.
The energy-focused operations should deliver annual operating profit of £12mn (2023-24) and £13.3mn (2024-25), implying that as a standalone entity they are worth far more than Avingtrans' market capitalisation of £118mn and enterprise valuation of £120mn. The median rating of peers in the small-cap industrial sector is 13 times (2024) and 11 times (2025) operating profit estimates to enterprise valuation. It means that you get a free ride on the group's nascent medical operations as well as surplus land in Luton that should be worth £10mn (30p) to a housebuilder.
Exciting opportunity in medical imaging
Avingtrans is investing in next-generation helium-free MRI technologies for orthopaedic imaging systems through a 75 per cent stake in Magnetica, an Australian medtech and engineering company, and a 100 per cent stake in Oxford-based Adaptix (3D x-ray systems for orthopaedic and veterinary applications).
The total addressable orthopaedic imaging market is expected to be worth £1.7bn in annual sales by 2030, and even larger for the group’s ‘pay for scan’ business model, which will reduce the total costs of dedicated MRI systems, increase the scan rate and free up capacity on the existing installed base. Adaptix already has regulatory approval in the US orthopaedic market, and is gearing up sales channels for volume production, and Magnetica should get the green light from regulators to launch its products later this year.
Analyst Paul Hill at PMH Capital believes the medical imaging businesses could ultimately be worth £150mn (456p). Of course, it will take further investment to scale them to the point of generating the revenue and profit to warrant such a valuation. The losses from the medical division explain why brokerage Cavendish expects last year’s adjusted pre-tax profit of £9mn to fall to £2.3mn (2024) and £3.5mn (2025). However, the end game could be huge capital upside for shareholders.
It’s also likely that Avingtrans' astute management team will release some of the hidden value in the group’s balance sheet by disposing of previously acquired businesses that have been turned around to realise bumper gains. They have an enviable track record, hence why the shares have delivered a 92 per cent total return (TR) in my 2017 Bargain Shares Portfolio.
Offering decent further upside to analysts' target prices of 495p (Cavendish) and 510p (Singer), the shares remain a buy.
■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.
They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com
