Avon Rubber — Delivering growth

Avon Technologies (LSE: AVON)

Last close As at 21/11/2024

1,137.00

22.00 (1.97%)

Market capitalisation

GBP344m

More on this equity

Avon Rubber — Delivering growth

Avon Rubber’s pre-close trading statement demonstrates the underlying growth in both divisions. Success continues to flow from the enhanced product portfolio and order progression is building visibility. We have made modest changes to our forecasts to reflect currency and the Merrick’s acquisition.

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Avon Rubber

Delivering growth

Year-end trading statement

Aerospace & defence

14 September 2018

Price

1,390.00p

Market cap

£431m

$1.30/£1

Net cash (£m) at 31 March 2018

39.1

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.5

(4.8)

47.1

Rel (local)

5.8

0.5

47.8

52-week high/low

1475.0p

909.0p

Business description

Avon Rubber designs, develops and manufactures product in the protection (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

FY18 results

14 November 2018

Analysts

Annabel Hewson

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3077 5700

Avon Rubber is a research client of Edison Investment Research Limited

Avon Rubber’s pre-close trading statement demonstrates the underlying growth in both divisions. Success continues to flow from the enhanced product portfolio and order progression is building visibility. We have made modest changes to our forecasts to reflect currency and the Merrick’s acquisition.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

142.9

20.7

70.5

9.5

19.7

0.7

09/17

159.2

25.9

83.3

12.3

16.7

0.9

09/18e

160.8

26.5

74.2

16.0

18.7

1.2

09/19e

166.6

28.5

75.3

20.8

18.5

1.5

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

Pre-close trading update

Avon’s pre-close trading update reflects the strength in its protection markets, with expected full year divisional revenue growth of c 7% on a constant currency basis. This includes slightly higher than guidance deliveries of M50 mask systems to the US Department of Defense. While activity in the law enforcement area has continued to deliver growth, the fire business has continued to reflect the market softness seen in H118. milkrite I InterPuls has seen a step-up in performance in H218, particularly in North America, and is on track to deliver revenue growth of c 4% on a constant currency basis. In June, the company completed the acquisition of the distribution rights to Merrick’s calf nurser product line for $2.1m.

Modest forecast adjustments

We have made modest adjustments to our model to reflect the better than expected dollar translation rate for FY18 and the acquisition of Merrick’s. Looking forward, improved product mix and operational leverage should support operating margin growth in both divisions. For FY19, in the Protection division we reflect the substantial carry-over of 83,000 M50 mask systems plus future success with the M69 Joint Services Aircrew Mask and the M53A1 combined tactical mask and PAPR system. For milkrite I InterPuls, while the Merrick’s acquisition is supportive, we maintain some caution as we keep a watch on feedstock pricing.

Valuation: Premium justified

Taking an average of our DCF and our sum-of-the-parts valuations gives a fair value price of 1,499p vs 1,450p previously. This reflects the uplift in peer group multiples. On a FY18e P/E of 18.7x, the stock continues to trade at a premium to its UK aerospace and defence peer group. We feel this premium is justified given its exposure to the growing US defence budget environment and the heightened chemical, biological, radiological and nuclear (CBRN) global threat.

Changes to financials

The following table outlines the changes to our forecasts.

Exhibit 1: Revised forecasts

£000s

2018e

2019e

 

Prior

New

% change

Prior

New

% change

Avon Protection

108,702

110,898

2.0%

111,963

114,225

2.0%

milkrite I InterPuls

50,635

49,894

(1.5)%

53,167

52,389

(1.5)%

Total Sales

159,337

160,792

0.9%

165,130

166,614

0.9%

EBITDA

36,254

35,935

(0.9)%

38,373

38,324

(0.1)%

Avon Protection

20,436

20,405

(0.2)%

21,681

21,648

(0.2)%

milkrite I InterPuls

8,203

8,233

0.4%

9,145

9,011

(1.5)%

Unallocated

(2,000)

(2,000)

0.0%

(2,000)

(2,000)

0.0%

Underlying EBITA

26,639

26,638

0.0%

28,825

28,659

(0.6)%

Underlying PTP

26,464

26,453

0.0%

28,479

28,496

0.1%

EPS - underlying continuing (p)

74.3

74.7

0.5%

75.3

75.8

0.6%

DPS (p)

16.0

16.0

0.0%

20.8

20.8

0.0%

Net debt/(cash)

(49,703)

(46,173)

(7.1)%

(67,995)

(64,502)

(5.1)%

Source: Edison Investment Research

Exhibit 2: Financial summary

£000s

2016

2017

2018e

2019e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

142,884

159,200

160,792

166,614

Cost of Sales

(90,159)

(101,500)

(102,515)

(106,227)

Gross Profit

52,725

57,700

58,277

60,387

EBITDA

 

 

29,922

36,300

35,935

38,324

Operating Profit (before amort. and except.)

 

 

24,031

30,300

29,635

32,021

Intangible Amortisation

(3,154)

(4,200)

(2,997)

(3,362)

Exceptionals

(4,808)

(7,000)

(4,002)

(4,004)

Other

(33)

(35)

(36)

(38)

Operating Profit

16,036

19,065

22,600

24,617

Net Interest

(154)

(200)

(148)

(125)

Profit Before Tax (norm)

 

 

20,690

25,865

26,453

28,496

Profit Before Tax (FRS 3)

 

 

15,882

18,865

22,452

24,492

Tax

1,824

2,900

(3,148)

(4,661)

Profit After Tax (norm)

21,765

25,500

22,750

23,081

Profit After Tax (FRS 3)

17,706

21,765

19,303

19,831

Average Number of Shares Outstanding (m)

30.3

30.4

30.5

30.5

EPS - normalised (p)

 

 

70.5

83.3

74.2

75.3

EPS - (IFRS) (p)

 

 

58.5

71.5

63.4

65.1

Dividend per share (p)

9.5

12.3

16.0

20.8

Gross Margin (%)

36.9

36.2

36.2

36.2

EBITDA Margin (%)

20.9

22.8

22.3

23.0

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

16.8

19.0

18.4

19.2

BALANCE SHEET

Fixed Assets

 

 

77,469

66,700

62,946

56,281

Intangible Assets

47,357

40,400

39,332

36,005

Tangible Assets

30,112

26,300

23,614

20,277

Investments

0

0

0

0

Current Assets

 

 

52,886

80,500

101,586

122,478

Stocks

20,648

21,800

22,511

23,559

Debtors

19,968

23,800

23,315

24,159

Cash

4,495

26,500

47,560

66,560

Other

7,775

8,400

8,200

8,200

Current Liabilities

 

 

(36,641)

(39,000)

(39,913)

(41,654)

Creditors

(34,142)

(37,200)

(38,525)

(39,595)

Short term borrowings

(2,499)

(1,800)

(1,387)

(2,059)

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

72,062

84,590

CASH FLOW

Operating Cash Flow

 

 

30,504

29,754

34,490

35,504

Net Interest

(147)

(154)

(200)

(148)

Tax

(17)

2,900

(3,148)

(4,661)

Capex

(6,838)

(5,500)

(8,943)

(6,001)

Acquisitions/disposals

(3,300)

0

4,400

0

Financing

(1,812)

(1,000)

(1,000)

(1,000)

Dividends

(2,430)

(3,200)

(4,126)

(5,366)

Other

(803)

(96)

0

0

Net Cash Flow

15,157

22,704

21,473

18,328

Opening net debt/(cash)

 

 

13,161

(1,996)

(24,700)

(46,173)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(1,996)

(24,700)

(46,173)

(64,502)

Source: Company reports, 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

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Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, 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 4, 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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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