Small cap audio visual presentation group Avesco has risen by nearly 150% over the last year. It might have made an appearance in the SIF portfolio before now, were it not for the group’s small size.
However, the shares have surged higher since 1 September, when Avesco said profits were likely to be “comfortably ahead” of expectations this year. This has pushed Avesco’s market cap up to £53m, above my screen’s £50m threshold.
Despite these gains, the shares still look attractively valued to me. Avesco has been trading well and Stockopedia’s computers are keen, too. Avesco has a StockRank of 99.
What’s the story?
Avesco has four main operating companies. These provide audio-visual services and equipment for live events, corporate presentations and broadcasters. The main source of both revenue and profit is the Creative Technology or CT division. This provides audio-visual solutions and technical staging for major events all over the world, such as Wimbledon, the Olympics and major music tours.
The big screens, clever lighting and computer-generated effects you see used on live television and stage sets may well be provided by Avesco’s CT division. This is an area where I’d imagine long-term growth potential is strong. The scale and complexity of this kind of thing seems to increase every year.
CT generated 80% of revenue and virtually all of the group’s profit last year. This may cause you to wonder whether Avesco’s other businesses are pulling their weight or merely dragging down the group’s return on capital.
In at least one case, the answer is that it’s a drag -- and it’s going. You might expect Fountain Studios at Wembley -- which hosts the X Factor among other primetime glories -- to be a profitable business. But Fountain made a trading loss of £0.1m in 2015 and only broken even in 2014.
Avesco rightly decided that this business was generating an unacceptably low return on capital, especially when compared to the freehold value of the land and buildings it owned on the site. The good news for shareholders is that these assets were sold for £16m earlier this year, generating £13m of cash and a profit of £6m. The cash was used to reduce debt and Fountain Studios Wembley is now due to close early in 2017. Although I…
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