Avon Rubber — Winning ways

Avon Protection (AVON)

Last close As at 27/03/2024

1,137.00

22.00 (1.97%)

Market capitalisation

344m

More on this equity

Avon Rubber — Winning ways

Following the nomination of preferred bidder status in November, Avon has announced that an agreement has been reached with the UK Ministry of Defence (MOD) for the General Service Respirator contract. The contract builds order visibility on both sides of the Atlantic while demonstrating the new strategy in action.

Analyst avatar placeholder

Written by

Avon Rubber

Winning ways

UK MoD contract

Aerospace & defence

15 February 2018

Price

1,210p

Market cap

£375m

$1.39/£1

Net cash (£m) at 30 September 2017

24.7

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.8)

13.6

18.9

Rel (local)

4.6

16.6

18.6

52-week high/low

1,325p

909p

Business description

Avon Rubber designs, develops and manufactures products in the respiratory protection, defence (70% of 2017 sales) and dairy (30%) sectors. Its major contracts are with national security and safety organisations such as the DoD. 75% of sales are from the US and 25% are from Europe.

Next events

Capital markets day

13 March 2018

H118 report

2 May 2018

Analysts

Annabel Hewson

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

Following the nomination of preferred bidder status in November, Avon has announced that an agreement has been reached with the UK Ministry of Defence (MOD) for the General Service Respirator contract. The contract builds order visibility on both sides of the Atlantic while demonstrating the new strategy in action.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

142.9

20.7

70.5

9.5

17.2

0.8

09/17

163.2

25.6

82.3

12.3

14.7

1.0

09/18e

163.2

26.4

74.5

16.0

16.2

1.3

09/19e

169.2

28.1

74.7

20.8

16.2

1.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

UK contract

Avon was selected by the UK MoD as preferred bidder for the resupply and in-service support of its General Service Respirator on 3 November 2017. The contract announced today is a build to print of the current Scott Safety design over a five-year period. There is a required build-up lead-time, including tooling and approvals, with production starting in H119.The additional investment required for this contract increases group capex guidance to £9m for FY18, up from the prior level of £6m. We have adjusted our forecasts for this increase, with a modest 0.1% reduction in FY18 EPS and 0.4% reduction in FY19 EPS. Overall, the contract should generate c £16m in revenues over the five-year period. This contract does not change revenue or divisional profit guidance.

Defence backdrop

We are encouraged to see the contract win against a challenging procurement backdrop for the UK MoD. Following the contract announcements from the US Department of Defense (DoD), it is clear that Avon is driving business on both sides of the Atlantic, while building further visibility into its order book. Overall, we see FY18 as a year of transition for the Avon Protection division with modest top-line growth countered by a currency headwind. We expect a modest tick-up in operating margin in FY18, progressing further with top-line growth in FY19. We also expect the division to continue to leverage off its product portfolio and drive further order growth.

Valuation: Strategy supports premium

Our DCF valuation on a calculated WACC of 8.0% currently delivers a value of 1,297p. On 16x 2018e P/E, the stock is trading at a discount to its UK aerospace and defence peer group. However, the company’s growth strategy, higher-than-industry-average profitability and building order book afford Avon Rubber the opportunity to deliver further medium-term upside earnings potential and hence justify a valuation premium, in our view.

Exhibit 1: Financial summary

(£000s)

2016

2017

2018e

2019e

Year end 30 September  

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

142,884

163,200

163,226

169,153

Cost of Sales

(90,159)

(101,500)

(101,516)

(105,202)

Gross Profit

52,725

61,700

61,710

63,950

EBITDA

 

 

29,922

36,000

36,095

38,048

Operating Profit (before amort. and except.)

 

 

24,031

30,000

30,024

31,819

Intangible Amortisation

(3,154)

(4,200)

(3,372)

(3,300)

Exceptionals

(4,808)

(7,100)

(4,002)

(4,004)

Other

(33)

(35)

(36)

(38)

Operating Profit

16,036

18,665

22,613

24,476

Net Interest

(154)

(200)

(171)

(406)

Profit Before Tax (norm)

 

 

20,690

25,565

26,444

28,073

Profit Before Tax (FRS 3)

 

 

15,882

18,465

22,443

24,070

Tax

1,824

2,900

(3,147)

(4,581)

Profit After Tax (norm)

21,765

25,200

22,742

22,739

Profit After Tax (FRS 3)

17,706

21,365

19,296

19,489

Average Number of Shares Outstanding (m)

30.3

30.4

30.3

30.2

EPS - normalised (p)

 

 

70.5

82.3

74.5

74.7

EPS - (IFRS) (p)

 

 

58.5

70.2

63.6

64.5

Dividend per share (p)

9.5

12.3

16.0

20.8

Gross Margin (%)

36.9

37.8

37.8

37.8

EBITDA Margin (%)

20.9

22.1

22.2

22.5

Operating Margin (before GW and except.) (%)

16.8

18.4

18.4

18.8

BALANCE SHEET

Fixed Assets

 

 

77,469

66,700

63,087

56,557

Intangible Assets

47,357

40,400

36,928

33,634

Tangible Assets

30,112

26,300

26,158

22,924

Investments

0

0

0

0

Current Assets

 

 

52,886

80,500

97,015

120,907

Stocks

20,648

21,800

22,022

23,049

Debtors

19,968

23,800

23,804

24,668

Cash

4,495

26,500

42,990

64,990

Other

7,775

8,400

8,200

8,200

Current Liabilities

 

 

(36,641)

(39,000)

(38,466)

(43,652)

Creditors

(34,142)

(37,200)

(36,905)

(37,936)

Short term borrowings

(2,499)

(1,800)

(1,561)

(5,716)

Long Term Liabilities

 

 

(51,713)

(52,600)

(52,558)

(52,516)

Long term borrowings

0

0

0

0

Other long term liabilities

(51,713)

(52,600)

(52,558)

(52,516)

Net Assets

 

 

42,001

55,600

69,078

81,296

CASH FLOW

Operating Cash Flow

 

 

30,504

29,754

34,199

34,952

Net Interest

(147)

(154)

(200)

(171)

Tax

(17)

2,900

(3,147)

(4,581)

Capex

(6,838)

(5,500)

(9,005)

(6,017)

Acquisitions/disposals

(3,300)

0

0

0

Financing

(1,812)

(1,000)

(1,000)

(1,000)

Dividends

(2,430)

(3,200)

(4,118)

(5,339)

Other

(803)

(96)

0

0

Net Cash Flow

15,157

22,704

16,729

17,845

Opening net debt/(cash)

 

 

13,161

(1,996)

(24,700)

(41,429)

HP finance leases initiated

0

0

0

0

Other

0

0

0

(0)

Closing net debt/(cash)

 

 

(1,996)

(24,700)

(41,429)

(59,274)

Source: Avon Rubber accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avon Rubber and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avon Rubber and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Avon Protection

View All

Research: Healthcare

ReNeuron Group — Consolidation confusion?

ReNeuron’s recent 100 for 1 share consolidation was a benign and cosmetic ‘tidy up’ of its historical capital structure. The share price of ReNeuron is trading at 52-week lows and the recent consolidation may have been an unrelated or an unintended cause for concern for some investors. ReNeuron’s valuation is now below its c £40m cash position. In this update, we offer some possible thoughts on this overreaction and, in the absence of operational newsflow, our forecasts and valuation are largely unchanged.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free