Paul Hill's Tip of the Week: An engineer that bucks the manufacturing slump

Given the battering the UK manufacturing has taken over the past 25 years, it's unusual to find an attractive investment in the sector. But Paul Hill's tip of the week is exactly that.

The UK manufacturing sector has taken a battering over the past 25 years. With the fight against cheaper imports, shrinking profit margins and pension deficits, metal bashers and engineers have struggled. The best have moved up the value chain or set up abroad, while others have sadly gone to the wall. It's therefore rare to find an attractive investment in the sector.

Tip of the week:

Avingtrans (Aim AVG: 132p), tipped as a BUY by Daniel Stewart

Avingtrans was listed as a cash shell on Aim in 2002 with the objective of buying undervalued engineering firms with strong positions in niche markets. Four years and four acquisitions later, at a cost of £14m, the strategy has succeeded. It's now a specialist engineer, designing, making and supplying products and services to the worldwide medical and technology industries. Its products include precision components for MRI scanners, aircraft engines and speed cameras. These are sold to blue-chip customers such as Siemens, GE Healthcare and Rolls-Royce, primarily in Europe and the US.

Demand for MRI scanners remains robust and is currently growing at around 10% a year due to the medical benefits of this non-invasive technology. The commercial aerospace industry is also in rude health (with the exception of Airbus's new A380 superjumbo). The only blot on the landscape has been the UK speed camera market, as orders have been held up by a Government study.

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Daniel Stewart forecasts revenue and earnings per share (EPS) for the year ending May 2006 of £35.3m and 15.8p respectively, rising to £39.8m

and 17.1p in 2007. At last week's trading update, management confirmed this, and said healthy aerospace sales had partly offset weakness for roadside cameras. Assuming these estimates are achieved, then the shares trade on undemanding p/e ratios of 8.2 for 2006 and 7.6 for 2007. This seems unduly mean, since most industrial engineers are valued on comparable multiples of ten to 15 times earnings. Furthermore, Avingtrans has avoided the pitfalls of pension deficits by providing only money-purchase schemes to its staff.

With an impressive track record and strong positions in growing markets, Avingtrans looks like a solid addition to a diversified portfolio. Although turnover is presently dependent on a few large customers, I expect this concentration to become less of an issue as management continues its aggressive strategy of organic and acquisitive growth.

Recommendation: BUY at 132p. Shares offer good value

Paul Hill's personal portfolio has gone up by 483% over the last five years. To find out more about his specialist share tipping service, 'Precision Guided Investments', click on the link below:

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.