Avingtrans was listed as a cash shell on Aim in 2002. Its aim was to buy undervalued niche manufacturing companies with strong positions in defensive markets. Eight years on, the firm is now a specialist engineer designing building and supplying critical components and services to the worldwide energy, medical, industrial and aerospace sectors.
Avingrans’ products include precision parts for MRI scanners, aircraft engines and roadside cameras. These are sold primarily in Europe and America, but also increasingly in China, to blue-chip clients such as Siemens, Balfour Beatty and Rolls-Royce.
However, technological prowess is no guarantee of financial return in these cut-throat times. Like its peers, Avingtrans has been badly affected by profit margins pressure and order delays during the recession. That’s especially true in its nuclear decommissioning and scientific research divisions, where government budgets have been temporarily frozen ahead of the general election. Nonetheless, don’t write the company off just yet.
Avingtrans (Aim:AVG)
End markets such as Asia, South America and China may be challenging right now, but all still possess good long-term growth dynamics. The firm is also profitable and cash generative and should end the year to May with net debt of £9m. Crucially, it will also be trading within its banking covenants.
As for the numbers, KBC predicts sales and Ebitda for the year ending May 2010 of £29.9m and £1.8m respectively, rising to £35m and £3.3m in 2011. I rate the stock using a ‘through-the-cycle’ Ebitda multiple of six, assuming a sustainable profit margin of 10%. After adjusting for debt, that generates an intrinsic worth of about 55p per share. Moreover, given the depressed valuation, a trade buyer could well pounce to push Avingtrans’ specialist products to a much larger international audience.
Interestingly, the shareholder register is stuffed with serial entrepreneurs and activist investors, all sure to be looking for an exit at some point. And Avingtrans is thankfully not burdened by a pension deficit that could act as a poison pill to potential predators.
On the downside, investors need to be aware of the usual dangers associated with recovery plays and the trading challenges posed by microcap shares.
Recommendation: SPECULATIVE BUY at 34p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments