Mark Watson-Mitchell likes what he sees at niche engineering business Avingtrans, which has shown resilience during the pandemic.
Generally, I am not too keen on quoted businesses that appear to contain a ragbag of interests.
However, in the case of Avingtrans (LON:AVG) I do make an exception and it is not such a ‘ragbag’ as it seems.
It has built up over the last two decades through making acquisitions of companies that need tighter management, that can be improved and are able to be sold off in due course. Those purchases have fallen into business units inside three distinct sectors – energy, medical and industrial.
Across its subsidiaries the group handles the design, manufacture and supply of critical components, modules and associated services into those three sectors.
Principally the company operates in the energy and medical segments.
The company is engaged in the design and manufacture of machined and fabricated pressure and vacuum vessels and process plant and equipment for the power, oil and gas and medical markets.
It is also involved in the design and manufacture of fabricated poles and cabinets for roadside safety cameras and rail track signalling equipment.
Its sales in the year to end-May 2020 were split – 46.3% in energy – process solutions and rotating equipment; 43.3% in energy – engineered pumps and motors; with the balance 10.4% coming from medical – medical and industrial imaging.
The company’s geographical locations include the UK, Europe, North America and the Rest of the World. On a per region basis its sales broke down as 39.1% UK, 18.4% US, Asia Pacific (not China) 15%, Europe (not UK) 12.3%, China 7.3%, Americas and Caribbean (not US) 4.4%, and finally Africa and the Middle East 3.5%.
Its acquisition model over the years has developed into a strategy that the group labels as ‘PIE – pinpoint, invest and exit’.
It has focussed upon buying and building up engineering companies in niche markets, where it sees potential in turnaround and consolidation.
With its lean central structure and its experienced ‘value-add’ management teams the group has progressed along a profitable course for the last ten years or so.
That has enabled it to cope with the hassles of Covid-19 and predictions are that current year profits will increase on last year.
In late September, when announcing its final results to end-May 2020, management stated that its markets had continued to develop, despite Covid-19. They went on to state that merger and acquisition opportunities remained a priority.
It noted that businesses like those inside the Avingtrans portfolio, can command high valuations at the point of exit. It will continue to refine its business by pinpointing specific additional acquisitions as the opportunities arise, to build businesses which can create superior shareholder value, whilst maintaining a prudent level of financial headroom.
Hopefully, that will enable the group to endure any subsequent headwinds, Covid-19, or otherwise.
Analyst Richard Hickinbotham at brokers N+1 Singer is estimating a 23% increase in current year pre-tax profits to £37.4m, on sales just £5.1m better at £119m, giving earnings of 19.8p amply covering a 4.1p dividend per share.
For the year to end-May 2022 he goes for £126m of sales, £8.1m pre-tax, earnings of 21.7p and a dividend of 4.3p per share.
There are some 31.8m shares in issue, larger holders include Harwood Capital (11.51%), BlackRock Trustees (8.9%), RBC Trustees (6.9%), Unicorn Asset Managers (6.1%), the Directors (6.1%), Threadneedle Investments (3.3%), BGF Investment (3.37%), LGT Bank (3.1%), and Liontrust Investment (1.74%).
A recent placing of 10.3% of the equity at 250p, by long-term holder Nigel Wray, was very quickly snapped up by BGF, Harwood and some smaller others.
The group’s next results will be its interims in February, with a trading update due in late January. However, before that we do have the AGM being held on Wednesday 18 November. Will we get an update then – who knows?
Anyway, I like the potential of these shares over the next couple of years. Now at 260p, trading on just 13 times current and only 11.9 times prospective earnings, the shares have strong appeal and offer a good steady upside – they were 334p before the virus.
I now set a target price of 325p.