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Read on to see an article posted on the Deep Value Shares blog on 28 October 2016:

Searching for a new net current asset value investment

I’ve scanned the entire UK market for new NCAV investments. Only two made it to my first short-list – maybe the low availability of NCAV shares tells us something about the price level of the UK relative to balance sheet value?

I have to do a lot more work on these before I can report any real analysis to you. However I can give brief outlines of why these two got to be shortlisted.

Avingtrans

This company is a collection of niche engineering businesses. The directors seem to like putting together sub-scale firms, melding them and then selling the viable division created.

In May they sold the largest unit, an aerospace business, for £52m cash. The whole company is valued by the stock market at £55.4m.

It has net cash of £51m and a first-glance crude NCAV of around £54m (before removing one-third of inventory and one-fifth of receivables, or allowing for the value in saleable property).

So, it is probably not a solid NCAV buy (that is yet to be determined by a more thorough analysis) but if there was a move down in the share price by a relatively small amount then it might become a solid NCAV investment by having sufficient margin of safety.  Therefore it might be worth putting on the watch list for now. 

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Some words from the aerospace division sale announcement will give you some flavour of how they run this business:

“Following the proposed Transaction, Avingtrans will continue to develop the Energy and Medical markets …….. It is intended that Avingtrans will return a substantial portion of the proceeds of sale to shareholders [£28m is to be return through a share buyback].

As well as partly repaying the Group’s existing debts, the retained portion of the sale proceeds will be used to continue to build Metalcraft’s leadership in Energy related markets (notably in the nuclear sector) and potentially in other high value engineering niches, where the Board believes that it can use its turnaround expertise to add substantial shareholder value.

Steve McQuillan, CEO, commented “I am delighted to announce the agreement to sell the Aerospace Division. Following a strategic review the Board concluded that it was the right time to consider the disposal of the Aerospace business which had achieved the majority of its targets. This transaction further demonstrates Avingtrans’ track record in growing successful businesses and realising value for shareholders. The proceeds of this transaction will enable the return of substantial value to shareholders while also providing additional investment for the Energy and Medical businesses where the Board believes there are exciting prospects which have the potential to deliver significant further value for shareholders.”

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Background to and reasons for the Disposal

A strategic review of the Avingtrans group and its prospects was carried out during 2015. There were four key outcomes of this review:

  1. Avingtrans has a successful track record of growing businesses from start-up, developing them internationally, and crystallising value through their sale at an appropriate stage in their development, as demonstrated by the successful sale of JenaTec in 2012.
  2. Following the successful conclusion of the acquisition of the Rolls-Royce pipe business (completed in March 2016), the Board felt that it had achieved the majority of the targets which it had set for the Aerospace Division and it was the right stage in its development to consider a disposal of the business.
  3. Subject to achieving an attractive valuation for the Aerospace Business, the Board believed that shareholder value would be maximised over the mid to long term by disposing of the Aerospace Division and returning part of the proceeds from the Disposal to shareholders, with the Company also reinvesting part of the proceeds into strengthening the Group’s position in the Energy sector and potentially other high value engineering sectors.
  4. The Board believes that the successful contract win by the Energy and Medical business with Sellafield in May 2015 (of the initial tranche of 3M3 nuclear waste disposal containers) demonstrated the significant business opportunities available in this market, if the Group were able to put more focus and resource into this sector.

 

Over the last few years, the Company has successfully grown the Aerospace Division, to become an international leader in its chosen niche markets of aerospace pipe and duct manufacture and precision surface finishing. This development has been underpinned by a number of modestly priced acquisitions, which have enabled the Aerospace Division to build a strong market position and to produce improved performance. The Board believes that this has enabled the Company to be able to realise significant value for shareholders through the Disposal, at a significant premium to the cost of the original component parts.”

Initial observations:

  1. The fact that the directors voluntarily shrunk their empire by half through the handing of £28m to shareholders indicates an interest in shareholder value.
  2. They have no strong emotional attachment to their businesses leading to irrational decisions regarding disposal, closure or expansion.
  3. They seem to be good a spotting opportunities to combine niche engineers into a coherent whole making an attractive package for another firm to acquire.

 

I’ll have fun analysing Avingtrans next week.

The other company is Lamprell, which I’ll briefly describe in tomorrow’s Newsletter. 

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Read more sample articles:

31 Oct 2016 - Words of wisdom for investors

29 Oct 2016 - Lamprell – is it a net current asset value investment?

28 Oct 2016 - Searching for a new net current asset value investment

 

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