The arguments for how different sectors may be impacted by AI are more nuanced than the headlines suggest
Nottingham-based engineer Avingtrans (AVG:AIM) offers a combination of profit growth, improved forecast quality and the scope for earnings upgrades. This should be sufficient to sustain the re-rating story previously covered in our Small Caps section (Small Caps, Shares, 30 May, 3 Oct).
Based on consensus earnings per share (EPS) forecasts of 10p for the year to May 2014 and 12.1p for the 12 months to May 2015 the group trades on a price/earnings (PE) ratio of 18.3 falling to 15.3. This rating appears justified when you consider these estimates imply EPS growth of 43% in the current fiscal year and 20% in the year ahead. Avingtrans stacks up well under the price/earnings to growth (PEG) metric employed in this week’s Cover story, with a prospective PEG ratio of 0.43.
Avingtrans has two key businesses: Sigma produces pipes and other components for engine suppliers into civil aircraft, while Metalcraft addresses the energy and medical sectors. Key to the ongoing transformation of the group is a shift to a buoyant civil aerospace sector. It secured its latest multi-year agreement with Rolls-Royce (RR.) at the beginning of last month (1 Oct). The £55 million contract to supply self-locking nuts to the FTSE 100 engine manufacturer follows on from a previous £80 million award and takes the worth of long-term contracts signed up in the last 12 months to £180 million.
Shrewd moves
Corporate activity has supported the change in Avingtrans’ focus as proceeds from the £13.5 million sale of Jena-Tec in November 2012 have been utilised to acquire two aerospace concerns, Aerotech and PWF Farnborough, for £1.9 million apiece. The £49 million cap is not neglecting other markets; a £1 deal in July to buy distressed and loss-making Maloney Metalcraft is expected to increase scale in the oil and gas space.
The £2 million in cash picked up as part of the acquisition is expected to be sufficient to restore this operation to profitability but if management is being overly aggressive in its assumptions this could trip up the company. More generally a lack of free cashflow (FCF) as the group invests in these newly acquired concerns must be watched. Broker finnCap forecasts negative FCF of £2.4 million for May 2014 with modest FCF inflow of £1.1 million in 2015.
Further deals cannot be discounted. As chief executive officer Steve McQuillan explains to Shares the group is considering a small bolt-on acquisition to boost its exposure to the US aerospace sector.
In this context, the show of confidence provided by a 50% bump in the final dividend alongside September’s prelims was welcome, as was the reduction in net debt below £3 million for a gearing ratio of less than 10%. A forecast dividend per share of 2.9p for the May 2014 financial year rising to 3.5p in May 2015 implies a prospective yield of 1.6% advancing to 1.9%.
This might seem modest but it is worth remembering how few of the company’s Aim-quoted peers pay a distribution and this is a dividend growth story. As noted last month (see Cover, Shares 24 Oct) firms which consistently increase their payout tend to outperform.
Avingtrans (AVG:AIM) 183p BUY
Stop loss: 146.4p
Market value: £49.3 million
Prospective PE Dec 2013: 18.3
Prospective PE Dec 2014: 15.3
1-month relative strength: 21.1%
1-year relative strength: 58.7%
Prospective dividend yield: 1.6%
Bid/offer spread: 6.6%
Growth: HIGH
Double-digit earnings growth is forecast for the current financial year and the year ahead. The group could even outpace these expectations.
Risk: MEDIUM
Despite its transformation Avingtrans remains exposed to cyclical industries and would be hurt by a downturn in the economy.
Quality: MEDIUM
An increasing number of long-term agreements and a shift to the aerospace sector are improving visibility for the company.