Valuing a company is as much judgement as it is maths. Typically, I start with growth potential, IPR, margins, scalability and management, and then move on to PE, EBIT, cashflow, PEG, balance sheet, dividend and gearing ratios.
However, when taken in isolation, these financial metrics often don’t accurately reflect the true intrinsic worth of rapidly expanding firms like Avingtrans (AVG) . Instead, this specialist engineer has two exciting divisions alongside some surplus land, which in my view should be valued on a 'sum-of-the-parts' basis.
The larger is 'Advanced Engineering', which serves the nuclear, oil & gas, defence, transport, and industrial sectors. What's more, the business continues to go from strength to strength - lifting H1'24 adjusted EBITDA to £8.5m (+20% YoY) on revenues up 24% LFL to £63.7m, reflecting secular demand for its niche product (e.g. blast proof doors) and aftermarket services.
To me, Advanced Engineering is worth 12x-14x EBIT, equivalent to 425p-500p/share - more than underpinning AVG’s entire £114m market cap on its own and effectively giving the rest of the group away for free.
Elsewhere, there's also some spare freehold land (worth c. £10m+) in Luton, which might be monetised in due course. AVG’s nascent healthcare division (H1’24 sales £1.5m) - including Adaptix Ltd’s and Magnetica Limited’s patented X-ray and MRI devices - is making great strides too. First sales have already been shipped for its patented small-form X-ray machines, with the MRI devices approx. 12 months behind, assuming FDA approval later in H2'24.
Both subsidiaries are aiming to capitalise on the untapped $7bn+ market for small-form scanners, providing crisp 3D orthopaedic and veterinary images at the 'point of care' (e.g. in doctor's surgeries). Furthermore, there is another possible $1bn+ opportunity to deploy the same X-ray technology within industry for things like identifying production defects.
Ok, so how much might the healthcare arm be worth?
Well, given its growth potential, TAM, and attractive unit economics, I would guess that it could ultimately be valued at over £150m - which combined with AVG's traditional engineering side could deliver a total SOTP valuation of >£9/share.
In comparison, house broker Singer Capital Markets have a price target of 510p/share. Net debt closed Nov'23 is at a modest £2.2m vs net cash of £13.0m in May, after acquiring Slack & Parr (£6.3m) and Adaptix (£7.4m), alongside higher working capital. Over the next 18 months though, there is a good chance of disposables, which would realise substantial cash proceeds.
CEO Steve McQuillan commenting: "We’re investing in both of our divisions, [& seek] to optimise shareholder value through future exits. The Group is well-positioned to meet FY'24 expectations."
Lastly, AVG’s FY24 and FY25 revenue cover is 95% and 60% respectively, providing excellent forward visibility.
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