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LONDON (Alliance News) - Avingtrans PLC saw its shares drop Wednesday after it confirmed a sharp drop in pretax profit and revenue for the first half of its financial year as its aerospace unit was hit by a large reduction in demand from a major customer and its energy and medical division was hit by the sliding oil price.
Still, a large proportion of the pretax profit drop came after last year's result was bolstered by a GBP2.9 million gain, and its adjusted earnings before interest and tax rose thanks to lower costs. Chief Executive Steve McQuillan was cautious about the company's short-term prospects but told Alliance News he was confident of meeting the company's reduced full-year expectations and was more positive about its next financial year, particularly in the aerospace unit.
The company reiterated that it would respond to the oil price fall by cutting headcount and shutting down one of its energy and medical manufacturing units.
The AIM-listed maker of components and modules for the aerospace, energy and medical sectors has been going through a transformation since it sold its industrial business in 2012, building up its remaining units through acquisitions. Some of the recent acquisitions have been of distressed companies that Avingtrans decided were a good fit with its existing niches, and it is in the process of turning them around.
The company said the short-term challenges to its business wouldn't sway it from its new long-term strategy, although McQuillan told Alliance News there were unlikely to be any new deals in coming months given the necessary restructuring and investments it needs to make.
Avingtrans reported a pretax profit of GBP259,000 for the six months to November 30, down from GBP2.9 million a year earlier when it had been boosted by the GBP2.9 million gain. Revenue declined to GBP27.5 million, from GBP32.2 million, although its adjusted earnings before interest and tax rose to GBP0.8 million, from GBP0.6 million thanks to a drop in distribution costs and administrative expenses.
The company had revised down its expectations for the year as a whole last November, warning of a downturn in demand in its aerospace arm and contract delays for its energy and medical business.
On Wednesday, it said the customer programme reduction in the aerospace arm was largely confined to the first half of the financial year, and it's now seeing stability returning in its mature business while new programmes were growing.
McQuillan told Alliance News the company is expecting a higher run-rate in the aerospace unit in the fourth quarter compared with a year earlier, and it's also expecting some improvement over the second half in the energy and medical division due to its non-oil work. The de-stocking by a key aerospace company was mainly confined to the first quarter, he said.
Its diversification of the aerospace unit to reduce its reliance on work with Rolls Royce Holdings PLC had in November led to it winning a 10-year deal worth about GBP25 million to provide selected fabricated assemblies for the Airbus a350 widebody jet programme.
In its energy and medical division, Avingtrans said the oil price decline - Brent oil is currently trading at about USD58 a barrel compared with over USD115 a barrel last June - had hit prospects for its Maloney business with projects being delayed or cancelled.
It is now restructuring the division and will close its Aldridge manufacturing plant, relocating the operations to its Chatteris plant. It will sell the Aldridge site, which it said should help improve its cash position.
It generated GBP0.4 million of cash from operations in the first half, up from GBP0.1 million a year earlier, although net debt stood at GBP5.7 million at the end of the half, up from GBP3.6 million at the end of May. Gearing was 17%
Chief Financial Officer Stephen King told Alliance News that gearing was set to rise to 19% by the year end, but the company would look to reduce the debt position "over a period of time" whilst still making the necessary investments in the business. Working capital needs were higher than expected in the short term, he said.
"As part of the restructuring programme, we will see some one-off costs this year, including site closures, mergers and sales, to make us fitter for the future. Our faith in the Aerospace, Energy and Medical markets is undiminished and we are forging ahead with our strategy, despite short-term set-backs," Chairman Roger McDowell said in a statement.
McQuillan said the company is assuming that the oil markets will remain depressed for some time, as even if the oil price rapidly improve it will still take a year to 18 months to feed through into increased capital expenditure by oil industry companies given the depressed state of the market. Avingtrans' energy and medical engineering team is now focused on non-oil work, he said.
Avingtrans also said the ramp-up of its Metalcraft China operations is still proceeding slowly due to lower-than-expected demand from customer Siemens AG, but Crown's markets had continued to improve with over GBP2 million of new orders booked in the half. Crown makes poles for roadside safety cameras and signs and rail track signal gantries.
The company still raised its interim dividend to 1.0 pence a share, up from 0.9p last year, a move said reflected its confidence in its full-year expectations. Given the company usually pays about a third of its total annual dividend at the interim stage, that suggests a dividend of 3.0p for the year as a whole, up from 2.7p in its last financial year.
Back in November the company had predicted that adjusted pretax profit and revenue for the year to the end of May 2015 would be flat year-on-year, excluding revenue and losses from the acquisition of RMDG Aerospace from Tricorn Group PLC in August. McQuillan told Alliance News that those expectations are unchanged.
"Aerospace volumes have now stabilised and the oil sector forecast can't get materially any worse for us, so we anticipate an improved result in the second half," the company said on Wednesday.
"We think aerospace is in good shape for next year," McQuillan told Alliance News.
"The end result of the restructuring activity will be a headcount reduction of over 10% across the group, with fewer sites and an improved cost base," the company added in its statement.
Avingtrans shares were down 9.5% at 104.50 pence midday Wednesday, representing its lowest level since the company's profit warning in late November. It is also one of the worst-performing stocks in the AIM All-Share index on the day.
Still, Numis has raised Avingtrans to Add, from Hold, while FinnCap has retained its Buy rating on the stock, with the brokers saying the first-half results suggest the company is on track to meet reduced full-year expectations and is well placed for the medium term.
FinnCap has a 135 pence price target on the stock and Numis, which is the company's nominated adviser, broker and financial adviser, a 138 pence target.
FinnCap and Numis are both forecasting the company will report a pretax profit of GBP3.0 million for the current financial year as a whole, rising to GBP4.0 million next year, according to data on Morningstar. The total dividend is expected to rise to 3.0 pence this year and then 3.3 pence in fiscal 2016.
Numis analyst David Larkam thinks delivery of the 2015 financial forecasts and greater confidence on 2016 should see the company's rating improve. He thinks the company's debt ratios remain comfortable given a 1.1 times net debt to earnings before interest, tax, depreciation and amortisation ratio expected for the 2015 financial year as a whole.
Avingtrans reported an adjusted pretax profit of GBP3.5 million in its last financial year, up from GBP1.9 million a year earlier, as revenue rose by a third to a record GBP60.3 million, from GBP45.3 million.
By Steve McGrath; stevemcgrath@alliancenews.com; @stevemcgrath1
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