Stockwatch: Odds move in favour of this share

Is Avesco poised to surprise on the upside again? This £43 million AIM-listed creative technologies group is low-profile and has omitted any trading update ahead of mid-January prelims; but the last time it did report, at last June's interim results, it cited "another strong performance", with trading profits the highest since 2001 and full-year results (to 30 September) "again likely to exceed the board's prior expectations".

Such a tenor makes it likely that momentum has continued, and this restructured group should be well-positioned to take advantage of the Olympics in Rio de Janeiro in 2016. While the group has quite a volatile financial record, partly due to the life-cycle of entertainment shows, the five-year table shows a boost in 2012 - the last Olympic year.

Good performance ought also to result as economic growth consolidates. Avesco's services enable company presentations - it's rather cyclical spending, but should continue to pick up since the recessionary years.

Broadcast entertainment is also influenced by the sporting calendar. In the year to 30 September 2014, revenue comprised 41% from the US, 39% UK, 12% continental Europe and 9% rest-of-world. Relative strength in the US and UK economies should be helping. In June, management said its main creative technologies side was achieving "excellent progress" in the US, and that losses in Germany, which had previously held back group numbers, had been eliminated.

Valuation is useful

At about 225p, Avesco presently trades on a 12-month forward price/earnings (PE) multiple of about 13 times, based on two forecasts last June, which were undemanding in context. Both were similar and included finnCap, the company's adviser and broker, implying guidance from management. Avesco has not indicated progress radically different from market expectations, and the board should know the 2014/15 numbers by now, which at least limits downside risk. Prelims were last released on 15 January, which puts the stock in the frame for the New Year.

Despite re-rating from about 140p, initially to near 200p in response to the June interims, then up to 246p, Avesco currently yields about 3.5%. That's based on expectations for the dividend to step up from 5.0p to 7.0p in the current financial year, then 8.0p in 2016/17.

The interim dividend rose from 1.5p to 2.0p, although earnings per share were significantly better - 13.3p based on continuing operations - versus a 12.4p loss per share in the six months to end-March 2014, as a restructuring concluded. Such a dividend isn't high enough to attract income investors, but was expected to be twice covered by earnings and affirms cash generation.

Interim results reflect strong US progress

The six months to 31 March 2015 showed disparity in profit/revenue growth as the group moved on from restructuring its German creative technologies business. Consequently, a £5.5 million operating profit was struck compared with a £0.5 million like-for-like loss, after exceptional items. Like-for-like revenue increased by just 1% to £66 million, reflecting scaled-down operations in Germany and a lack of major events during the period.

Within such headline numbers the context was healthy, albeit reliant on the creative technologies side, which represents about three-quarters of revenue. The division's operating profit rose by £2.2 million to £5.5 million on revenue up £2.0 million to £51.6 million, the US being the main contributor with revenue growth of 14%. This is attractive also from a currency translation angle amid US dollar strength, if partly offset by high taxation in the US - which cannot be offset by any losses elsewhere.

Creative technologies also did well in the Middle East and Spain, but continued to struggle in Asia Pacific - which is likely to remain a drag, if small in context.

Elsewhere in services, the mclcreate "one stop shop" equipment hire business saw revenue grow 7% to £7.9 million, with operating profit tripling to £0.6 million, helped by a better margin and the Scottish branches. The broadcast services side took off some shine, however, as a £0.8 million like-for-like profit became a £0.4 million loss, although the 2013/14 period benefited from equipment disposals.

Understandably, some investors will want to see better performance, although events timing looks a likely factor in first-half variability. The interim's outlook statement had cited last June's inaugural European Games in Baku as expected to deliver significant income across the group, another factor creating intrigue ahead of the prelims.

More stable trading due

Despite a bumpy five-year record and somewhat mixed interims, management said it had honed the group "to produce a more stable and less volatile set of trading results" which could imply something of a turning point. The bull case involves a decent set of prelims shortly, benefits of the Olympics in 2016, and more consistent progress henceforth. The chief bear risk is deflationary recession spreading - e.g. ripples from China and Brazil, global instability if the plunge in oil festers - but the US and UK show very little signs of this as yet, and the Olympics should buttress the 2015/16 year.

The risk/reward profile is also helped by a robust balance sheet: at end-March, property/plant/equipment represented £58.7 million; intangibles were scant and there was no capitalised goodwill. Debt profiled as £8.9 million short-term debt and £26.5 million longer-term, versus £10.4 million cash, in context of £34.3 million net assets.

Directors have mainly added to holdings in 2015

There has not been any director share trading since June when chairman Richard Murray sold 540,000 shares to several executives, mainly three directors, among them finance director John Christmas, at 175p.

There was then further modest buying by board member Graham Andrews, who added a total 8,000 shares at prices from 185p to 199p, to hold 570,183 shares - or nearly 3% of the company. So, while there have not been any eye-raising trades lately, the ownership context is good.

An interesting time to re-appraise Avesco

Despite an absence of updates since June, the indications were upbeat and the main creative technologies side should have continued to benefit from US/UK economic strength, while issues in Germany are said resolved.

Likewise, it's conjectural how there is scope to beat forecasts and define a more stable financial profile, but the odds look to be moving in Avesco's favour; hence, the stock rates a speculative 'buy', targeting fresh highs in 2016.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.