The share price is up 20% since the start of the year and the company’s exposed to a whole host of fast-growing markets. And there’s a lot more to like about the business besides this.

Growth industries

Data centres, defence, and nuclear power are some of the fastest-growing industries at the moment. And Avingtrans is exposed to all of them. 

The firm’s a supplier of critical industrial components. These include cooling solutions for data centres, pumps and propulsion units for submarines, and safety systems for nuclear sites.

Artificial intelligence (AI) growth, increased defence spending, and the need for energy security are likely to boost demand in all of these industries. And Avingtrans stands to benefit.

The company however, isn’t just a cyclical operation in the right place at the right time. There’s also a really interesting long-term structural growth strategy.

Acquisitions

Avingtrans is a collection of smaller subsidiaries that operate in various industries including – but not limited to – the ones listed above. And acquisitions are a big part of its growth story.

This part of the strategy will be very familiar to investors who follow companies such as Ametek, Diploma, or Judges Scientific. But Avingtrans has another important dimension to it.

The firm’s strategy isn’t just to buy and hold businesses indefinitely. Instead, it looks to acquire companies, improving their operations, products, or financial position – and then sell them on.

In this way, Avingtrans is a bit like a private equity operation. But investing its own capital means it can sell when it’s ready instead of having to dispose of assets into weak markets.

Risks

Moving on from businesses after improving them gives Avingtrans another advantage. It helps the overall company remain small and focus on opportunities that are too small for other firms.

That means it can often make acquisitions at attractive multiples. But the strategy of looking for targets where it can add value does bring some additional risks of its own.

It means Avingtrans has to be right about being able to improve the businesses it acquires. In some cases, it’s bought firms out of administration, so it needs to be able to fix them.

Bringing them into its existing operations worked well with Slack & Parr – a 2023 acquisition. But this process isn’t guaranteed to work, even for a skilled and experienced operator.

One to watch

Acquiring and developing industrial businesses has been an effective strategy for a number of companies. And in a lot of cases, there have been huge returns for investors as a result. 

Avingtrans is looking to bring this strategy to some of the fastest-growing industries right now. And I think it’s worth a place on an investor’s watchlist at the very least.

The stock’s up 65% in the last 12 months, but it trades at a lower multiple than the likes of Ametek and Diploma. So it might be worth more than just a look right now.

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Growing fast

Today’s sparkling full-year results from Avingtrans (LSE: AVG) are dominated by the first nine-month contribution from the firm’s gargantuan September 2017 acquisition of Hayward Tyler Group. The enlarged company designs, manufactures and supplies critical components, modules, systems and associated services to the energy, medical and industrial sectors, and sees the expansion as transforming forward prospects.

The directors said last year that the enhanced scale of the business will enable it to “achieve critical mass and make inroads into the Chinese nuclear energy market,” which sounds exciting. It’s all part of the firm’s strategy to “buy and build” in regulated engineering niche markets. The integration of the new business has gone well and “ahead of schedule,” and we can’t really argue with the figures the firm posted today. Revenue blasted up 247% compared to the equivalent period the year before, which delivered a blistering rise in adjusted diluted earnings per share of more than 660%. I reckon Avingtrans will be pleased with its purchase.

However, there’s more to the story than paid-for acquisitive growth. Underlying revenue excluding gains from acquisitions went up nearly 11% too, proving that the firm is also making organic progress. The directors expressed their confidence in the outlook by pushing up the full-year dividend by almost 6%. The shares are perky today, up around 6% as I write, but I think there’s much more to come for investors as the company’s growth strategy unfolds in the years ahead.

Big increase in the dividend

I also like the look of intellectual property (IP) advisory services provider Murgitroyd Group (LSE: MUR). Although last month’s full-year results report showed revenue for the period essentially flat, underlying basic earnings per share shot up 21%. The directors were not shy about matching investor returns with the firm’s performance and they pushed up the total dividend for the year by 24%.  

The firm is another that mentioned macroeconomic and political uncertainties as a factor to worry about in the outlook statement, but insisted that it operates in a market “with good long-term prospects.” The directors believe that the firm’s growth in earnings and the dividend will continue. The dividend is up around 70% over the past five years and if such progress carries on, I reckon it will drive the share price higher too. At today’s share price around 682p, the forward dividend yield for the trading year to May 2020 sits just under 3.5% and I think the payment is worth collecting while we wait for further rises in the shares.

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I feel like that when I look at Arix Bioscience (LSE: ARIX), a company that came to market only in February 2017, having raised £100m in an oversubscribed offering. Its investors included Woodford Investment Management on behalf of clients, and a couple of international pharmaceuticals companies.

The aim, in the words of chief executive Dr Joe Anderson at the time, is “supporting businesses in the vanguard of medical innovation.“

Though it’s too early for there to be any meaningful financial valuations, Arix has been making steady progress in financing for a number of start-up companies and has signed a few key strategic agreements.

New deal

One came Wednesday as the firm has partnered with Ipsen, which it described as “a global specialty-driven biopharmaceutical company focused on innovation and specialty care.“

The deal will see the two developing and commercialising innovative therapies, with Ipsen gaining access to Arix’s professional and scientific advisors. In turn Ipsen will “contribute research, development and commercial expertise to the partnership” and the two will work to “jointly create new companies focused primarily on the development and commercialisation of innovative therapies for patients.“

This comes on the back of a similar agreement on 19 February with Fosun International to collaborate in pretty much the same way, and I think it points to an increasingly attractive-looking road towards profit.

There’s no profit currently forecast, so Arix is very much a ‘blue sky’ investment. But I’d say it deserves a close look.

Return to growth

Post-recovery growth can be a profitable investment too, and that’s what Avingtrans (LSE: ABG) is showing. After a few disappointing years, the small-cap engineer has some very strong forecasts on the cards. There’s a trebling of EPS indicated this year after a return to growth, followed by a further 86% in 2019.

Avingtrans sold off its aerospace division in 2016, returning £19m to shareholders in the process, and the company is currently focused on products and services for the energy and medical sectors. 

Now subsidiary Hayward Tyler has secured a $6.7m contract with Korea Hydro & Nuclear Power. It has been providing pumps and spare parts for more than 40 years, and the new order is for spares to upgrade and refurbish existing nuclear power plants.

Avingtrans only completed its acquisition of Hayward Tyler in September 2017, and this latest development means it has already contributed more than $10m in orders.

Good first half

Interim results from Avingtrans should be with us on 28 February, and January’s update told us that the first half has gone well and that results should be in line with forecasts. At the time, the firm had already secured new contracts to the value of almost £7m, including deals in the UK, Sweden and South Korea.

The key event has been the integration of Hayward Tyler, and that looks to me to be a potentially big driver of future growth.

The dividend is modest with a prospective yield of 1.7%, but it’s progressive and should be well covered by 2019. And there was year-end net cash on the books at 31 May of £26.4m.

Avingtrans could turn into a cash cow in the next decade.

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And while the headline figures were disappointing, I believe that this is the perfect opportunity for long-term investors to get involved in the group’s growth story. 

A transformational year 

For the year, Avingtrans reported sales growth of 7% to £22.7m and adjusted earnings before interest, tax, depreciation, and amortization of £0.7m, up 104% year-on-year. Adjusted profit before tax was £0.3m, compared to 2016’s figure of £0.1m. Unfortunately, after including costs, the company reported an unadjusted loss of £0.3m. 

However, during the year, it overhauled its business model and going forward I believe that the company can generate huge returns for investors. 

After selling its Aerospace division for a healthy profit in 2016, and returning £19m to investors, management has decided to adopt a strategy it calls “Pinpoint-Invest-Exit,” based on the “now proven strategy of ‘buy and build’ in regulated engineering niche markets.” This looks similar to the model used by engineering giant Melrose, which buys businesses, helps them reach their full potential, and then sells them on. 

As part of this strategy, Avingtrans made modest acquisitions of Scientific Magnetics and the assets of Whiteley Read Engineering during the financial year. After the year-end, the company acquired Hayward Tyler Group. According to management, “an unfortunate combination of ambitious investment programmes, acquisition and market down-cycle led HTG to an overstretched balance sheet position.” Avingtrans hopes to be able to get the business back on track and growing again. 

Buying, building and selling can be lucrative if done correctly. That said, plenty could go wrong with such a strategy and investors need to keep an eye out for the tell-tale signs that management has bitten off more than it can chew.

If the firm’s sales growth starts to slow, costs expand rapidly, and cash generation vanishes, these could be signs that the problems at HTG may be deeper than initially believed. On the other hand, if costs fall, sales continue to grow, cash generation improves, and margins widen, Avingtrans should be heading in the right direction.

Slow and steady 

Castings (LSE: CGS) is three times the size of Avingtrans, so the company’s growth is slower than that of its smaller peer. Nonetheless, I still believe that this business can achieve stellar returns for investors. 

Since the beginning of 2015 the shares have produced a total return of 45%, and as long as the company can maintain its operating profit margin of 14% and return on capital employed of 14%, the returns should continue. 

Wide margins and a high return on capital mean that the company has been able to invest for growth and return cash to investors at the same time. Book value per share has grown at around 6% per annum for the past six years, and at the end of fiscal 2017, Castings had net cash on the balance sheet of £27m. The shares currently trade at a forward P/E of 15.8 and support a dividend yield of 3%. 

As long as Castings’ business continues to throw off cash, I would not rule out the prospect of additional special dividends. 

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Trading update

Reporting on Monday was component, modules and services designer and supplier Avingtrans (LSE: AVG). It announced an additional contract option with Sellafield. The contract is worth an extra £11m in revenue to the business, the majority of which is expected to be spread equally over the three years to 2021. It builds upon the company’s 2015 contract with Sellafield, which was worth up to £47m over a 10-year period.

As well as the announcement of a contract win, Avingtrans also reported that revenue for the year to 31 May was slightly behind management outlook. Despite this, it closed the year with adjusted profit before tax that was marginally ahead of internal expectations. It also has net cash of £26.2m and a strong order book for its Energy and Medical division.

Looking ahead, it is expected to record a rise in pre-tax profit of around 300% in the current financial year. Its pre-tax profit is due to rise from £0.3m last year to £1.2m in the 2018 financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it could offer enticing share price growth alongside relatively high risk.

Valuation challenges

While Avingtrans may offer a wide margin of safety at the present time, actuator manufacturer and flow control company Rotork (LSE: ROR) seems to be highly priced. Although it has upbeat earnings growth prospects of 8%-9% per annum during the next two years, its valuation seems to fully factor-in its outlook. For example, it trades on a price-to-earnings (P/E) ratio of 24.2. This translates into a PEG ratio of 2.8, which is high, even at a time when the FTSE 100 is close to an all-time record.

Certainly, Rotork is a high-quality business which has a sound track record of growth. However, its shares seem to offer little upside potential after rising by 23% during the course of the last year.

Furthermore, their income prospects may also be somewhat limited. The company currently yields 2.3% from a dividend which is covered 1.9 times by profit. This indicates that while there is dividend growth potential on offer, there may be stronger options available elsewhere. A number of stocks currently have higher yields than inflation, while others have more scope for rapid rises in shareholder payouts. As such, it may be worth awaiting a lower share price before buying a slice of Rotork for the long term.

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