Sector Spotlight: Industrial Engineering

In this weeks sector spotlight, I look at industrial engineering and ask whether any gems are lurking in this sector that investors may want to latch onto.

Article updated: 16 September 2020 12:00pm Author: Michael Baxter

The industrial engineering sector contains a lot of companies, many of them relatively small and a few giant.

I have been taking a look to see if any bargains lurk in the sector. I took two criteria: market cap over £50 million, and decent profit growth, of at least 50 per cent, over five years.

Below are the companies I found. I am not saying they all constitute good investments, but it’s a start, and I recommend you do a lot more research before buying. There may be some good investments in this sector among the companies I have not mentioned, especially among the smaller companies. But investing in companies worth less than £50 million is considered quite risky. As a rule I would say only invest if you have specialist knowledge of the company or sub-sector it operates in.

Avingtrans

Avingtrans manufactures engineered components and machineries. It makes safety-critical systems used in oil and gas extraction and processing equipment, vacuum vessels, poles, and cabinets.

Avingtrans: revenue has increased five-gold since 2016, pre-tax profit is up 15-fold. Yet over the same period profits have merely doubled. Then again, the company still has a P/E of 28, so that means its P/E five years ago must have been high indeed. Maybe more impressive even than that, is that in the year to May 31, revenue is expected to be comparable to the previous year. The company said: “It is notable that our results are expected to be close to original expectations despite the widespread disruption to our operations in all countries during our second half-year.”

Its balance sheet is quite strong — assets worth thoroughly twice liabilities and even current assets are worth more than total liabilities. Although the dividend yield is nothing special, it’s not bad for a company that has grown so fast.

Share price 228p
2020 high 330p
2020 low 185p
Five year high (2020) 330p
All time high (2020) 330p
Change last 12 months -5%
Change last five years 115%
Change since 1995 36%
Market cap £m 72
Yield % 1.67
P/E 29
Revenue growth since 2015 404.8%
Pre-tax profits growth since 2015 1,450
Total assets/total liabilities 2.3%
Current assets/total liabilities 1.0%
Current assets/current liabilities 1.3%
net assets £m  69.0

Hill & Smith

The company supplies a range of infrastructure and galvanizing products to customers in the UK and markets around the world, mainly the US, Australia, France, India and Thailand. Its range includes road safety barriers; pipe supports for the energy sector and coatings for fencing and structural steelwork.

It has two main sections:

  • Engineered products for the roads and utilities markets and operating in international territories with the prospect of sustained long term investment in infrastructure.
  • It provides zinc and other coating services for a wide range of products including fencing, lighting columns, structural steelwork, bridges, agricultural and other products for the infrastructure and construction markets.

Profits have doubled since 2016, but took a big hit in the six months to June 30, with underlying profits down by more than a third. The company’s division which provides metal coatings, was hit especially hard by Covid, thanks to plant closures.

But this is an example of a company that could benefit big time from the UK government’s strategy to invest heavily in the building of roads.

Share price 1,198p
2020 high 1,482p
2020 low 901p
Five year high (2020) 1,509p
All time high (2014) 1,509p
Change last 12 months 2%
Change last five years 64%
Change since 2014 2,345%
Market cap £m 952
Yield % 0.88
P/E 20
Revenue growth since 2015 48.5%
Pre-tax profits growth since 2015 87.9%
Total assets/total liabilities 1.8%
Current assets/total liabilities 0.7%
Current assets/current liabilities 1.9%
net assets £m  307

Halma

Halma sells safety, environment and health solutions. It has three divisions. It develops and sells visual warning systems, toxic gas and smoke detectors, electronic alarm systems and water leakage detectors.

Dividends have been increasing at this company for 41 years. Revenue fell four per cent between April and June. We live in such times that a company which announces a small fall in revenue is hailed as a star.

When the company recently revealed its latest results, Andrew Williams, Group Chief Executive of Halma, commented: “Halma delivered a record financial performance in the past year, and trading in the first quarter has been resilient despite the effects of the COVID-19 pandemic. This reflects our clear purpose and focused strategy, our flexible and agile organisation, and the resilient, long-term growth drivers in our chosen markets. We expect these strengths, combined with the quality of our people and our increasing investment in innovation and technology, to enable us to continue to create value for all of our key stakeholders in the years ahead.”

Back in April, the Tempus column in the Times described Halma as “a company made for times like these.”

Share price 2,301p
2020 high 2,338p
2020 low 1,667p
Five year high (2020) 2,338p
All time high (2020) 2,338p
Change last 12 months -5%
Change last five years 210%
Change since 1988 17,600%
Market cap £m 8,736
Yield % 0.72
P/E 47
Revenue growth since 2015 39.1%
Pre-tax profits growth since 2015 41.8%
Total assets/total liabilities 2.4%
Current assets/total liabilities 0.7%
Current assets/current liabilities 1.8%
net assets £m  1,137

Judges Scientific

One piece of data stands out on this firm, since 2016 pre-tax profits have increased by ten-fold, from £1.3million to £14million. Revenue is up too, but hasn’t grown so fast, it merely increased by half as much again.

Not surprisingly, shares have risen by quite the canter over this period, although I note that profit growth greatly exceeded share price growth.

But the growth story goes back even further. Shares have risen 50-fold since stock market listing in 2003.

The company specialises in the acquisition and development of a portfolio of scientific instrument businesses.

When it released its half-yearly trading update, the company stated: “The main adverse impact of COVID-19 has been, and continues to be, on order intake. Across the Group, Organic order intake for the six months to June 30 was down 17.3 per cent compared to the same period in 2019, caused by the closure of universities, the cancellation of scientific conferences and our inability to travel. This reduction in order intake has not been evenly spread across our key geographies with the UK decreasing five per cent China/Hong Kong and the Rest of Europe each down seven per cent; North America down 32 per cent and the Rest of the World down 24 per cent; Order intake also varied considerably from business to business. In May, Organic order intake recovered, to an extent, from the trough of April and then progressed slowly in June.”

Share price 4,960p
2020 high 5,680p
2020 low 3,400p
Five year high (2019) 5,660p
All time high (2019) 5,660p
Change last 12 months 44%
Change last five years 234%
Change since 2003 4,716%
Market cap £m 311
Yield % 1.01
P/E 27
Revenue growth since 2015 48.2%
Pre-tax profits growth since 2015 976.9%
Total assets/total liabilities 1.7%
Current assets/total liabilities 0.9%
Current assets/current liabilities 1.7%
net assets £m  29

MPAC Group

Pre-tax profits have increased from £2million in 2016 to £5.4 in 2019. The company has an interesting history; it used to make cigars operating out of Havana; it then made a move into packaging. These days it focused on supplying quality machinery, related support services and systems, mainly to the fast-moving consumer goods sectors, including tobacco, food and other high volume products. It says its mission “is to be a global leader of high- speed packaging solutions.”

In the six months to June 30, group revenue was at £36.8m, compared to 45.8m in the same period in 2019. Underlying profits before tax fell from £4.5million to £2.5 million.

Share price 315p
2020 high 367p
2020 low 175p
Five year high (2020) 367p
All time high (1996) 1,013p
Change last 12 months 51%
Change last five years 314%
Change since 1993 -34%
Market cap £m 64
Yield % 0.48
P/E 11
Revenue growth since 2015 2.3%
Pre-tax profits growth since 2015 170%
Total assets/total liabilities 1.9%
Current assets/total liabilities 0.9%
Current assets/current liabilities 1.5%
net assets £m  47

Melrose Industries

Melrose industries specialises in buying underperforming manufacturing businesses.

Areas it’s businesses operate in include aerospace, powder metallurgy, automotive, and Nortek Air Management.

In the six months to the end of June, adjusted revenue was £4,359 million from £5,875 the year before. It made a loss of £32 million from £332 million a year ago. Covid hit the business hard. Shares have fallen sharply as a result — roughly halved this year. Maybe the shares have been oversold.

Justin Dowley, Chairman of Melrose Industries PLC, said: “These are extraordinary times which we have addressed with rigorous cash management and decisive restructuring actions; recently, and encouragingly, we have started to see trading improving in some key end markets. Crucially, we own good businesses with significant improvement opportunities and have an experienced management team with an excellent track record. We have delivered good returns in tough times before. As we continue to make the strategic changes needed to position our businesses within their changed market environments, we are confident of doing so again.”

Share price 121p
2020 high 247p
2020 low 74p
Five year high (2017) 258p
All time high (201) 258p
Change last 12 months -41%
Change last five years 142%
Change since 2003 612%
Market cap £m 5,900
Yield % 1.4
P/E -101
Revenue growth since 2015 1,133.6%
Pre-tax profits growth since 2015 -253.6%
Total assets/total liabilities 1.7%
Current assets/total liabilities 0.4%
Current assets/current liabilities 1.1%
net assets £m  7,551

Severfield

Severfield is a steelwork contractor. Its projects include the 2012 Olympic Stadium, The Shard, Heathrow Airport, First Direct Arena in Leeds, Birmingham New Street Station, Wimbledon Centre Court, the Emirates Stadium and the Paris Philharmonic Hall. It also supplies and erects industrial buildings and distribution warehouses.

Profits have increased from £18 million in the year to the end of March 2017 to £27 million in the year to the end of March 2020.

The P/E ratio looks quite modest, and the dividend yield is attractive, and the balance sheet looks strong enough to sustain the dividends for post-Covid.

Its net assets are worth slightly more than the market cap.

Recently it said that its order book is now at last year’s level and chief executive Alan Dunsmore said: “We remain encouraged by the current level of tendering and pipeline activity across the Group despite evidence of some investment decisions being delayed.

“We continue to see a good number of opportunities, albeit at competitive prices, in our key market sectors, including in the industrial and distribution, data centre, infrastructure and stadia and leisure sectors.”

Share price 59.8p
2020 high 93p
2020 low 60p
Five year high (2017) 93p
All time high (2007) 317p
Change last 12 months -14%
Change last five years -8%
Change since 1988 648%
Market cap £m 184
Yield % 4.85
P/E 9
Revenue growth since 2015 24.8%
Pre-tax profits growth since 2015 44.4%
Total assets/total liabilities 2.2%
Current assets/total liabilities 0.9%
Current assets/current liabilities 1.2%
net assets £m  183

Spirax-Sarco Engineering

The company is a leading provider of steam and industrial fluid control solutions and a world leader in the peristaltic pumps business.

Its latest half-yearly results revealed a four per cent fall in revenue and an eight per cent drop in operating profit.

Nicholas Anderson, Group Chief Executive, said: “In the first half of 2020, we delivered a resilient trading performance, which although weaker than 2019 was stronger than originally feared. This was achieved thanks to the outstanding efforts and dedication of our employees all over the world, who continued supporting our customers despite the unprecedented circumstances arising from the COVID-19 pandemic.

“Sales performance for the Group in the second quarter was in line with our expectations at the time of our AGM Statement in May, with adjusted operating profit ahead due to stronger than anticipated cost containment and efficiency improvement initiatives. As hopes of a V-shaped recovery recede, we now anticipate a lower rate of economic activity in the fourth quarter. As a result, we believe that organic revenue growth in the second half of the year will be lower than we anticipated in May. However, due to the operating profit being stronger than forecast in the first half, our expectations for the full-year adjusted operating profit remain unchanged.”

Share price 10,615p
2020 high 19,760p
2020 low 7,710p
Five year high (2020) 19,760p
All time high (2020) 19,760p
Change last 12 months 33%
Change last five years 266%
Change since 1988 5,400%
Market cap £m 7,827
Yield % 1.04
P/E 47
Revenue growth since 2015 86.2%
Pre-tax profits growth since 2015 69.3%
Total assets/total liabilities 2.0%
Current assets/total liabilities 0.7%
Current assets/current liabilities 2.5%
net assets £m  826

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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