Avingtrans discussion

17th Jun '09 by marben100

4 comments 4731 reads

Welcome to all those with an interest in the company! Any suggestions for improvement to the header or thread "rules" are welcome. initially, I intend to be "liberal" and posts of all sorts relevant to Avingtrans are welcome. Should things get out of hand, I may introduce more rules.

Please bear with me as this is my first thread. Given that Avingtrans is a nice quiet stock, I think one thread for all discussion of this company will be sufficient. When I have a chance I intend to write a more extensive Wiki entry for the company.

As a quick summary, Avingtrans is an engineering mini-conglomerate. Their subsidiaries are all niche light-engineering manufacturers. I find their launch of an aerospace component manufacturing busness in Chengdu, China particularly intriguing. See Avingtrans' website for more details: http://www.avingtrans.plc.uk/ I have been an investor for some time.

Following a capital raising @ 50p/share in September 2008 - see http://fool.uk-wire.com/cgi-bin/articles/200809170700176007D.html - to refinance earlier expenditure on acquisitions & investment in new ventures, Avingtrans' debt/cash position appears satisfactory to me. Per the interims to 30 November 08 (http://fool.uk-wire.com/cgi-bin/articles/200902100700080465N.html ), net debt stood at £4.7m, against net current assets of £4.9m & tangible fixed assets of £10.3m. Interest cover wasn't great in 1H09 (~2x) but should improve.

It is important to note that Avingtrans' Board has been revamped. Ken Baker drove the business originally and had been due to step down a little while ago. However, in the light of the recession & business difficulties, he postponed his retirement for a period. KB has now taken retirement and been replaced as Chairman by Roger McDowell, in March 2008. Stephen Bruh also retired at the same time, as a non-exec. Steve McQuillan was appointed as CEO in October 2008. Peter Kenny was also promoted to the main board, from the medical & research division, as an executive director in 2008. So 2008/9 will mark the first full year for the new Board and we will see their impact on the business. I look forward to attending the AGM later in the year to form a better judgement of them. See this http://www.avingtrans.plc.uk/pages/people.html for profiles of the current Board members.

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marben100

14th Oct '09

Background

I made the journey up to Nottingham today, to attend Avingtrans' AGM. Having wrestled with car parking at the Hotel venue, I just about got there in time... as I was, once again, the only non-Director shareholder attending. Perhaps worth noting at this point that the current chairman (Roger McDowell) and his family own 16.0% of the stock; other directors 0.9%; the past Chairman, Ken Baker, 3.3%. Nigel Wray owns 15.3%. This is encouraging, being sufficient to firmly align management (or at least chairman!) interests with those of shareholders.

Attendees comprised Avingtrans' 6 directors and me. This made for a rather efficient meeting! The formal business was simply taken as read, as I intended to vote in favour of all resolutions anyway, and then I was invited to raise any questions that I had. It appeared to me that Roger McDowell had a pretty firm grip on the business but delegated my questions to other directors, as appropriate for answers. My impression (and it is no more than that, based on brief contacts) was that whereas Ken Baker was relatively easy going, Roger McDowell takes a more rigorous approach to business and is likely to be more demanding of his team. Responses detailed below are my interpretation/understanding and are not verbatim.

Q&A

Q1. The Annual report mentioned “operational improvements” and “lean manufacturing tools”. What is meant by that?

A1. This boils down to efficiency improvements in production line operations, by reconfiguring lines and allocating work more efficiently. In one case this reduced customer lead times from 10 weeks+ to less than 4 weeks.

Q2. What is the“Metalcraft floating production system”

A2. This was a contract to supply pressure vessels for an offshore oil FPSO system.

Q3. What is the relationship between Metalcraft's new Chinese operations and the Sigma/Chengdu operation?

A3. Nominally, they are unrelated. Metalcraft's new operation is "implanted" in the the production facilities of a new Chinese manufacturer of medical products, established by a Chinese-American entrepreneur. However, purely by chance, this new plant is close to the Sigma operation and both are able to share administrative functions.

Q4. One hears some horror stories about businesses establishing in China. What measures do you have in place to protect IP, physical facilities & customer relationships?

A4. Most IP remains in the UK at present. Sigma has not, so far, experienced any problems with pilferage etc. The Board's view is that whilst these issues are always a concern, the problem is less acute in Chengdu than in coastal regions, like Shanghai. Currently Sigma's output is purely for export and Sigma's relationships with western clients and its aerospace accreditations amke poaching difficult. Things will be more difficult, however, if (as planned) Sigma eventually starts manufacturing for the local Chinese market.

Q5. Who is the most senior member of staff that speaks Chinese?

[What lies behind this question is that western firms without Chinese speakers are at an obvious disadvantage in dealings with Chinese nationals and authorities.]

A5. Sigma's General Manager, who is an expat, has a good grasp of the local language (almost fluent). Roger hadn't actually realised that director Graham Thornton has also been leanring Mandarin (I think it was Mandarin, as opposed to Cantonese) himself!

Q6. What role can you foresee for Avingtrans in the UK nuclear new-build programme, what steps being taken to position the company for this?

A6. Metalcraft has a 20 year relationship with BNFL and is hoping to win vessel construction contracts for intermediate level waste. As usual, these contracts have been delayed by the slowly grinding wheels of government (and the NDA in particular). Whilst it has a high level of accreditation currently, Metalcraft is considering obtaining ASME Level 3 accreditation, which would qualify it above many competitors. Obtaining this accrediation will require significant administrative QA/QC effort but no new CAPEX.

In addition to work for the NDA, Metalcraft is liasing with Rolls Royce and Babcock about prospective new business under Areva's UK reactor build programme. Metalcraft's expertise in pressure vessels and exotic materials equips it very well for this work.

Q7. What is the state of play with Vehicle Occupancy Ltd (AVG owns 7% of it)?

A7. Whilst VOL's automated vehicle occupancy detectors worked well under lab conditions, they failed to perform against all types of windscreen. Work is underway to better tune the detectors to perform more robustly under real world conditions. Ken Baker is contributing his time to chair VOL but Avingtrans is not incurring any costs in relation to this.

Q8. I notice that the gross margin is slightly better than in 2007/8. Is there any scope for further improvement?

A8. Gross margin is likely to vary according to the nature of contracts undertaken over the course of the year.

Q9. Is Avingtrans more than the sum of its parts & why?

A9. This is an issue that appears to have been exercising the Board! Roger indicated that the group structure, above the major divisions/subsidiaries, was relatively lean. The high level of expertise contained within the Board team offered inputs to individual divisions/subsidiaries, as necessary.

Roger was focussed on generating shareholder value (considering the size of his shareholding, I'd expect him to be!). It was clear that the Board felt that the business as a whole was too diverse currently and would prefer it to focus on it's USPs. These are:

Expertise in engineering exotic materials
High value-added engineering, for specialist applications

as opposed to mass-manufacturing standard products/components.

Roger indicated that the rate at which the Board would like to act to improve the group structure was constrained by current market conditions. ISTM that there are certain divisions/subsidiaries that Avingtrrans would like to dispose of.

It was mentioned that the results presentation was now available on the group website.

Finally, I noted that no AGM statement had been issued and Roger stated that the Board had nothing to report that differed from current market expectations.

Conclusions

In the light of the results presentation, I thought I'd have alook at the current broker forecasts. I note that KBC Peel Hunt, NOMAD has reduced its 09/10 EPS forecast to 5.51p, putting AVG on a current year P/E of 7.7. That seems about right to me. From the outlook statements in the AR and the general tone, ISTM that 09/10 is likely to remain a tough year. On the positive front, I feel that Avingtrans has done well to remain profitable and reduce its gearing during this recession. There is also the potential, if AVG can capitalise on its strengths and isn't stymied by global economic conditions, for profits to be increased substantially but this is as unyet unproven.

I shall retain my modest holding and keep a close watch as events unfold.

Regards,

Mark

	EPS	DPS
2008/9	6.75	0.75
2009/10	7.51	0.75

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Marben100

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Background

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