Having navigated through a tricky period, Avingtrans should see a return to growth in FY16 as the aerospace volume build is fully reflected and a new nuclear opportunity comes on stream. Forecasts for double-digit growth in both EPS and DPS supported by a strong balance sheet do not appear to be adequately reflected in a single-digit current year multiple, with inorganic development also back on the agenda.
FY15 results were adversely affected by an early year destocking presumably at Rolls-Royce, as well as weakness in the energy business directly relating to the oil and gas market. Medical performed broadly in line with expectations. However, the prospects for the two main divisions are for a return to top-line growth in the current year. Aerospace (62% of sales, EBIT £2.8m) should benefit from customer volume growth and the absence of any destock, which should also help divisional EBIT margins recover to historic levels of 12% (FY15 8%). Energy & Medical (38% of sales, EBIT loss £0.2m) should benefit from the start of the new £47m contract for nuclear waste containers for Sellafield. The first phase is worth £7-8m over two to three years to set up production, with 1100 containers (3m3 steel boxes) required during the contract period. While Avingtrans is one of two suppliers sharing the contract, the long-term requirement is for 40k containers. In medical, Chinese exclusivity for Siemens has been released, which should add new revenue streams from local MRI producers. Management is also reducing overheads via site consolidations, while the £1.1m sale of the Aldridge site in August further strengthens the balance sheet (pro forma net debt £4.8m), leaving scope for M&A opportunities if they arise.
The continuation of stabilising oil exposures, combined with resumed growth elsewhere in energy and in both aerospace and medical, should see a healthy topline expansion. Management indicates that EBITDA margins should recover to >10% due to loss eliminations in Energy & Medical, as well as the RMDG business in aerospace, improved overhead recovery in aero-engine piping following FY15’s destock and overhead reductions across the group from the site rationalisation.
The current rating unsurprisingly reflects concerns over a repetition of FY15’s problems. However, as management executes the FY16 plan, any resumption of growth is likely to restore confidence, driving a healthy re-rating.