If you’re searching for a world class engineering firm that has pricing power, attractive margins, a rock solid balance sheet and is run by battle-hardened management, then have a good look at Avingtrans (AVG). It sells niche products and services - from blast proof doors for HS2 tunnels and waste storage boxes to Sellafield - to regulated sectors such as Industrial and Defence (38% of sales), nuclear (31%), hydrocarbons (28%), and medical (2%).
Today the company reported in line H1 2023 numbers, with revenues and adjusted EPS climbing 12% and 6%, respectively, to £50m and 10.8p, bolstered by resilient 12.8% EBITDA margins - delivering EBITDA of £6.4m - despite absorbing cost inflation.
Whats's more, it ended the year ended November 2022 with net cash sitting at a hefty £17.3m or 53p a share - up from £16.7m at the half year - reflecting robust cashflows, partly offset by strategic investments in Magnetica and Adaptix along with working capital relating to inventory build. That's meant Avingtrans has been able to nudge up the half year dividend by 6% to 1.7p/share, giving a yield of 1.1%.
Under the existing CEO and CFO, the stock has climbed more than 11-fold over past 13 years, from 33p back in March 2010 to 390p today – equivalent to a CAGR of more than 20% per annum. Of course, past performance is no guarantee of future returns. Yet equally, I wouldn’t bet against the board repeating the feat again over the next decade or so.
That's because on top of the impressive track record, demand is being buoyed by long term secular tailwinds within its core energy, nuclear and defence franchises – they're helping provide 90% revenue cover for FY 2023 and 55% for FY 2024. I believe this alone more than underpins the existing £125m market cap.
Additionally, Avingtrans has crafted an early stage, high potential medical devices division, which could literally transform the smallform X-ray and MRI imaging markets by offering crisp 3D, orthopaedic and veterinary focused scans for hands, elbows and feet at the point of care. Although early stage, the technology appears to be cutting edge after Adaptix received 510(k) FDA approval for its first orthopaedic X-ray machine in December 2022, with first sales expected this year. The progress also provides a blue print for Magnetica Limited, which is pursuing a similar commercialisation strategy.
To the numbers, and house broker Singer Capital Markets is forecasting FY 2023 turnover, EBITDA and adjusted EPS to rise to 8% on a like-for-like basis to £108.7m, £13.5m & 22p, respectively. It's expected to end the half year with net cash of £13.5m.
With that in mind, I’ve raised my sum-of-the-parts valuation to 580p a share from 560p previously – that compares to Singers’ target price of 510p. And if Adaptix & Magnetica can ultimately achieve their full potential, then I wouldn’t be surprised either to see the stock more doubled over the next 3-5 years.
CEO Steve McQuillan commented: “Avingtrans continues to invest across its 3 divisions, with a focus on the global energy and medical. After the performance in H1 coupled with the strength in our order book, the Group is well placed to achieve market expectations for FY'23.”
Watch our interview with Avingtrans CEO Steve McQuillan and CFO Stephen King here.