Avingtrans plc (LON:AVG) Chief Executive Officer Steve McQuillan caught up with DirectorsTalk to discuss their latest results, energy and medical businesses, M&A opportunities and what investors can expect from the company this year.
Q1: A solid set of results for Avingtrans in what I can only say was a difficult environment, but could you just talk us through the financial highlights?
A1: Yes, as you say difficult environment and we’ll probably come back to that but we are really pleased with the results for the year. We’ve seen turnover revenue go up to £100 million, we’ve seen our EBITDA rise also to £12.7 million, there’s a couple of opposite components there that we’ll talk about between energy and medical, but we’re happy with the progress there.
We’re also happy with the fact that we’ve been able to deploy some of our cash reserves onto particular investments, which we’ll again come back to I’m sure, but also still preserve the good amount of cash for the look forward. We’re in very volatile times at the moment and we anticipate that may throw up opportunities for us but we’re also well insulated from that volatility without having the cash resources available to us that we do.
Below that headline set of numbers, what you can see if you dig into it is that the two energy divisions together worked very well in the year, both of them reached close to or above 15% EBITDA outcomes for their respective divisions. Underlying their EBITDA between the two of them rose to £14.6 million EBITDA, that’s up almost 15% in total terms versus the previous year so both of them grew the EBITDA numbers very strongly.
In contrast to that, of course, medical where we already flagged, we were coming out of MRI component manufacturer, that’s all now about the investment in compact MRI systems, which I guess we’ll talk about in a minute. Therefore, that division course lost money, not surprisingly because we’re investing in it in a year and we don’t have product to sell yet but we’re really happy with the progress there, as I say, I’m sure we’ll come back to.
Q2: So, you mentioned energy and medical. If we just look at energy first, can you tell us more about the performance and the highlights in that division?
A2: So, I mentioned the profit already, the underlying profit grew strongly up by 15% for the two divisions in total, and what was really good to see is that they’ve both got really robust order books. We’re going into this year now with 90% order cover and 45% order cover for the next financial year FY24, that’s about 5% up in each year than we’ve seen the last couple years so we’re seeing definite increased demand.
That’s about the nature of markets within energy because as you know, within nuclear energy, both life extension, decommissioning and even new build stuff and new nuclear technology, and they’ve all seen good orders coming in from those sorts of markets within infrastructure. Whereas you’ll remember we’ve got a big contract, for example, with Booth for cross tunnel doors for HS2 and we’re also seeing good infrastructure contracts elsewhere.
Of course another big contract we have there is the Sellafield contract for nuclear waste containers, and that’s moved into phase two of that product now. We’ve got about a thousand of those to make over the next six years, and basically what we’re looking to do is deliver Sellafield some of those boxes pretty much every week now, that’s the plan looking forward. Of course with an eye on the horizon, there’s a much bigger contract for more of those boxes to come out in the next couple of years, we’re never sure of the timing of that, that’s only known to Sellafield but we’re very hopeful. As the only people that are now making those boxes, in phase two of the contract for Sellafield, when that next big part of the contract comes up, we’ll be well placed to get that contract.
What we’re seeing is, not surprisingly with what’s happening in the world, everybody wants to keep nuclear power going now, even Japan and Germany trying to increase nuclear power from having decided not to have any nuclear power at all, and so that’s good news for us.
Of course oil and gas being back to being a bit more flavour of the month than it was for the last few years being good news for us, particularly in aftermarket where people are looking to refurbish assets, things like pumps, motors etc. that they weren’t going to refurbished before, particularly in North Sea.
Another trend that’s helpful to us is you might know that with the government’s windfall tax on the energy companies, they get a good chunk of that money back if they invest in the North Sea and refurbish kit there. So, they’re all interested in doing that now, which they weren’t interested in the last couple years so that’s again good news position and good news trend for us.
Q3: Just turning to the medical division. Can you talk us through your involvement there and how it’s performing?
A3: It’s not really about the numbers at the moment, this is all investment so there’s two investments we’ve made there in a big way.
One is in the business we’ve talked about before, Magnetica, where we own the majority of that business and its target is compact helium-free MRI systems principally for orthopaedic applications and potentially for veterinary applications.
We’ve then made an investment of £4 million in an Oxford business called Adaptix, and that is doing exactly the same thing as Magnetica, accepting in X-ray. As you know, the two imaging modalities of complementary, X-ray is about hard tissue principally and MRI is about soft tissue so there’s a little bit of an overlap in the middle but not really much. They’re doing different sorts of imaging but for the same target markets.
Now, we’re not interested here in competing with the big guys like Philips, Siemens etc., that’s a waste of our time but we have come out of making components for Siemens because it could become a conflict. We’d seen for some time that that wasn’t a market that was going to grow for that so we wanted to focus on doing our own thing here.
The reason why we focus on areas like orthopaedics for example, in America there’s about 28,000 clinics where they’re either orthopaedic specialist clinics or walk-in ambulatory clinics where the folks walk in off the street and they’ve got a sprained ankle or a broken wrist or whatever and they want an immediate scan on that. With our much more formed systems, orthopaedic surgeries in America could have those systems on site, whereas typically at the moment they won’t have those kind of systems on site, you’ll go somewhere else to get scanned. Because the reduced cost, the reduced infrastructure cost, both Adaptix products and MRI products from Magnetica can go into those sorts of sites so that’s why that target is so important to us.
On the other hand, we have no intention of selling these products to hospitals, that won’t happen because they’re already kitted out with full body systems from the big players so they won’t be interested in buying from us. The orthopaedic guys will be interested, we know they are interested in these smaller form systems.
So, the plan there at the moment is Adaptix have already launched a veterinary product for X-ray and getting rave reviews from that from the initial sales. They’ve submitted their 510(K) regulatory submission to the FDA in America for their orthopaedic system and that they hope to have back in time for product launch in orthopaedics at a big medical show in Chicago at the end of November. That’s the one everybody wants to launch these sort of products at.
Magnetica is about a year behind Adaptix, they plan to submit their 510(K) during the course of next year to the FDA, and again, our plan is at that same medical show in 2023, we plan to launch the compact MRI system.
So, exciting times ahead in the next couple of years, still quite a lot of investment to make for both businesses to get to the promised result here but the market opportunity is huge. We estimate initially in MRI that the market opportunity could be£ 400 million, the more work that we’ve done now says the overall opportunity between x-ray and MRI in total can be as big as $3 billion a year. Now, we obviously won’t get all of that and there’s some substitution effects there that we won’t get into, but we expect to get a good proportion of that so we’re looking at a market between the two of them. It certainly should be worth hundreds of millions of dollars, if not one or $2 billion obviously over the course of a number of years.
It looks like it’s very exciting times for those two businesses.
Q4: You mentioned that the group continues to seek further shareholder value by enhancing M&A opportunities. Are there any areas that are particularly interesting at the moment?
A4: We’re pretty much focused on the areas of interest for us, which as you know, is regulated markets so we like nuclear, we like defence, we like aerospace, we like medical, those sorts of markets. They’ve got a lot of regulatory stuff around them and that suits us just fine because it means that it’s not as down and dirty in terms of pricing, there are fewer competitors and in particular, as I always say, if we went into automotive, the big OEMs will kill you before you got a chance to fix the business.
So, that’s been rich fertile ground for us and over the last decade or more and we continue to want to work in those sorts of markets. Geographically, we’re agnostic although one unhelpful thing about the pound at the moment is that any overseas acquisitions for us will now become more expensive. If it’s the right acquisition strategically, or that might not matter, but certainly that means probably more acquisition activity will be UK based than it will be overseas based in the short term. Most years we make an acquisition, so it’d be surprising this year we didn’t make one but who that’s going to be, when that’s going to be, I can’t tell you. We’re always stirring the port, there’s always a number of businesses we’re thinking about looking at, talking to even over a period of time so it’d be an unusual year if we didn’t make an acquisition. It’s not impossible, it’s a strange market in the moment, it should be good news for us but it’s all over the place out there.
Q5: You sound really confident in the outlook so what could investors expect from Avingtrans this year?
A5: I think more of the same really, and hopefully some good news on various contract awards. We’ve got some big contracts coming up, we won’t win all, but we should win some of them, and that should add to our forecasts.
We’re quite cautious on forecasting, as you know, because what we can’t tell is how all this volatility, whether it’s currency, whether it’s materials prices, whether it’s supply chain disruptions in terms of how long it’s going to take, how all that’s going to play out. So we’re quite cautious in our forecasting, but if we get some of these bigger contracts then we should be able to deliver more than we’re saying there, certainly that’s our target.
We’ll certainly look to at least deliver in line as we have done over the last number of years, and if we can get past that target so much the better. As we say, there’s always the extra potential acquisitions but I can’t predict that one with any accuracy all so we’ll have to see what happens.
