Stock Picks | Avingtrans - An Opportunity In Plain Sight?

20th Feb by jonno

15 comments 777 reads

Apart from the general apathy to UK small caps the shares have been additionally marked down because in my view Mr Market is incorrectly focussing on the investment the company is making in its medical division that comprises Adaptix (portable 3DX-ray) and Magnetica (portable MRI). This capital allocation will result in a significant decline in reported EPS over the next couple of years.

I see the potential success of Adaptix and Magnetica as a large cherry on top of a profitable cake. If Adaptix and Magnetica are successfully commercialised they are likely to be worth significantly more than the current market cap of the company.

My thoughts and views in no particular order.

The amalgamation of the Engineered Pumps and Motors (EPM) Division and the Process Solutions and Rotating Equipment (PSRE) division to form the Advanced Engineering Systems (AES) division, is a precursor to a sale of one of its companies. Booths Industries that manufactures blast proof doors has been suggested as the most likely candidate. Avingtrans (LON:AVG) bought Booths for a song from the administrators and has invested £3m to £4m in it. Its latest order book was reported at £36m. What would it fetch, I don't know but a price north of £20m has been suggested.

The Advanced Engineering Systems (AES) division is worth more than the current market cap. This leaves the nascent medical division and its significant potential in the price for free. According to CEO, Steve McQuillan, Avingtrans (LON:AVG) has already made its first sales of the Adaptix portable 3D X-ray scanner to veterinary practices.

Hayward Tyler (USA) has recently been awarded a $10m contract with Bill Gate's TerraPower, to design and develop heat pumps to enable the use of liquid sodium as a coolant. This is a high-profile win in the nuclear industry. Nuclear accounts for about 30 per cent of Avingtrans (LON:AVG) revenue.

Trading update 18 January: "I am pleased to announce that the Group's trading performance for the first half of the year is in line with the Board's expectations and, we are comfortable in achieving market expectations for FY24."

The award of the £900m contract extension to provide storage containers for spent nuclear waste from Sellafield is awaited. The Metalcraft division has current orders of approximately £70m for its 3M boxes for the storage of spent nuclear waste. Avingtrans (LON:AVG) is one…

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John LA

20th Feb

Thanks for your analysis, I think it's cracking company, very underappreciated

BnB

Agreed that it's a good company. But, as I queried on the daily thread, is Medtech within the two Steves' circle of competence? And where is the experience of commercialising medical innovation in the US? Get it wrong and the sunk costs will set the investment thesis back several years.

Cockerhoop

Hi jonno,
I think you may have understated the Booths orderbook. My understanding is it includes the £36m HS2 contract but is not limited to that contact. In FY23 they had an order intake of £25m (compared to revenue of £21.3m) with the highlight a Thames tideway project. They stated it is at record levels but I'm not sure they disclosed an actual value (maybe in the PH interviews??). Happy to be corrected if you have a value.

jonno

Some good points from Cockerhoop and BnB.

Regarding Booth's order book the £36m relates to phase 1 of HS2 and it may well have increased as Cockerhoop indicates. Next week's prelims should provide the answer

On the sphere of competence aspect raised by BnB, it looks as if the Adaptix 3D X-ray device has completed most of the hurdles in that it also has FDA 510K approval and some initial sales have already been made; However I accept that effective production, distribution and sales need to follow. So even if the Magnetica MRI scanner were to 'trip up', successful commercialisation of Adaptix on its own would be a game changer for the company.

However I accept that effective production, distribution and sales need to follow.

And this is the rub. Healthcare buyers are not the same as industrial buyers. They have different motivations. For example, they are much less open to change, and less persuaded by financial numbers, being subject to different drivers - like avoiding being sued for hundreds of millions of USD. Consequently the process of adoption is fraught with frustration, no matter how compelling the technology. My fear is that the management, and the fund managers - and small cap investors - backing the name, are seduced by the shiny MII bauble and not well versed in these go to market obstacles. These small cap fund managers are the same pool of investors who backed Renalytix and Maxcyte after all. And I think the balance of probability is that the company will end up selling both MII units at a loss relative to the acquisition and development expense just to clean up their portfolio and get back to their engineering knitting. So the right entry price has to reflect that. That said, I think we are close to that point and I'm considering opening a position and would be all in 10% lower.

rmillaree

Your comments make sense here BnB - dont know much about Avingtrans , but that marektplace looks ridiculously niche in nature - even if it may be large in size. Not sure how they ended up with something that specialised in the first place ?

Hi BnB

Pleased that we appear to be close to agreement on the current valuation. In terms of the likely end game for the medical division we can agree to disagree, albeit I would be surprised if there wasn't the odd stumble along the way.

I take your point regarding the 'go to market' differences of medical versus industrial, but If the result is an advanced quality device that serves the untapped market for which it was designed, it will, all things being equal be successful.

Each to their own, but personally I wouldn't bet against a management team that has proved itself adept over several years. I am of course biased, having first bought Avingtrans (LON:AVG) at around £2.

Whatever, I hope it works out well for all concerned. Hopefully you will get the opportunity to pick up shares around 310p and Adaptix and Magnetica will be successfully commercialised by Avingtrans (LON:AVG)

I will leave it there .

Al the best

Do you think it may have been that they already owned 2 companies (Tecmag & Scientific Magnetics) in the niche? :-) These companies were combined with Magnetica. They certainly have some previous experience in the MII space.

It's quite interesting that I think the medical imaging businesses would probably be valued more highly as an Aim start up with insecure funding and inexperienced management.

I think £20-25m is a ballpark valuation for Booths in its current form. £21m revenue @11% op margins which isn't far off the sort of multiple PB achieved. I suspect when HS2 doors move into production revenue will step up so perhaps they'll get a little more.

That marketplace looks ridiculously niche in nature

Yes. Have a look at the progress of 908 devices on the NDQ. It's a handheld life science tool designed for mobile applications - pollution leaks, forensics etc. Or Butterfly Networks, a handheld ultrascan tool on the NYSE. Not exactly the same, but a reasonable comparison. Promising early revenue growth has turned into a painful grind. And boy don't the charts show it. More to the point, profits are nowhere in sight for either.

If anyone is getting the feeling that I've been burned in the past, you're not far off the truth.

based on current market cap of MicroSalt (LON:SALT) perhaps you are right :)

22nd Feb

When a share hits to within 10% of my dream buy price, I usually buy a third of a position, another third at 5% etc. If it reverses before then and starts a run I usually panic and buy the rest! After this morning’s further drop, I managed to pick up a couple of thousand shares. Now I can’t get a quote for even a thousand more. With the RSI in the green <30 zone I’m surprised there aren’t more sellers being shaken out.

N0vice1Nvest0r

1st Mar

anyone interested in this stock should watch https://www.stockopedia.com/co...

Nice little boost to the SP since the TU on good relative volumes. Just a rebound from oversold, nothing that shouts new ATHs, but welcome all the same.

2nd Mar

Good to see the Slack & Parr integration running ahead of plan with it being EBITDA neutral in H1 and looking at EBIT neutral in H2.

The Steve's enthusing about S&P ability to produce at exceedingly high engineering tolerances suggests that once turned around the quality of the business will allow a high exit multiple presuming they can produce at a appropriate margin to match the quality of the product.

Avingtrans - an opportunity in plain sight?

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Jonno

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