Avon Rubber — Further backlog development

Avon Technologies (LSE: AVON)

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Avon Rubber — Further backlog development

The latest body armour contract for the US Defense Logistics Agency is for up to $333m, to be delivered over 3.5 years for a legacy product. Avon had identified it as an incremental value-creating opportunity which, when won, would trigger the contingency consideration of up to $25m for the Helmets and Armor business acquired at the start of 2020. We have increased our FY21 EPS estimates by 13% following the award of the first delivery contract. Avon operates in defence and dairy markets that should be relatively resilient as they are deemed essential in the US, UK and Italy.

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Avon Rubber

Further backlog development

Body armour contract award

Aerospace & defence

27 March 2020

Price

2,405p

Market cap

£734m

US$1.22/£1

Net cash (£m) at 30 September 2019

48.3

Shares in issue

30.5m

Free float

96.8%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.9)

11.9

91.6

Rel (local)

10.0

49.1

137.0

52-week high/low

2780p

1252p

Business description

Avon Rubber designs, develops and manufactures products in the protection (72% of 2019 sales) and dairy (28%) sectors. Its major contracts are with national security organisations such as the US DOD. Over 70% of 2019 sales were from the US.

Next events

H120 results

19 May 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

The latest body armour contract for the US Defense Logistics Agency is for up to $333m, to be delivered over 3.5 years for a legacy product. Avon had identified it as an incremental value-creating opportunity which, when won, would trigger the contingency consideration of up to $25m for the Helmets and Armor business acquired at the start of 2020. We have increased our FY21 EPS estimates by 13% following the award of the first delivery contract. Avon operates in defence and dairy markets that should be relatively resilient as they are deemed essential in the US, UK and Italy.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/18

165.5

27.2

76.6

16.0

31.4

0.7

09/19

179.3

31.4

90.9

20.8

26.5

0.9

09/20e

233.0

35.4

93.1

27.1

25.8

1.1

09/21e

288.4

49.2

129.5

35.2

18.6

1.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Before adoption of IFRS 16.

Essential supplier as COVID-19 creates uncertainty

While not immune to the impacts of COVID-19, Avon’s two main markets are defence and dairy, which are classified as essential by the US, UK and Italian governments. As the pandemic progresses, it is possible that some production interruptions may occur, but at present the impact has been limited. The Chinese distribution operation has reopened, and European and North American operations might need to react for staff safety at times going forward.

Legacy contract win should enhance from FY21

The latest contract award from the DOD for body armour inserts for small arms protection is worth between $19m and $333m for delivery over the 2021–23 period. It is the legacy product contract that had been identified at the time of the purchase of the new Helmets and Armor business at the start of 2020 which triggers the contingency consideration element of up to $25m. $3m is due immediately and the balance is payable dependent on the scale of delivery orders received. Avon will initiate $5m of additional capex spread over FY20 and FY21 to support all of the recent Helmets and Armor contracts, meaning a higher cash outflow in FY20 as deliveries do not commence until early 2021. As winning the legacy contract was not in guidance, we have marginally increased our finance costs for FY20, and have increased our FY21 EPS estimates by 13% to reflect $40m of off-take after the start of deliveries next year following receipt of the first $20m supply contract. FX could provide a further tailwind if the current weakness of sterling is maintained.

Valuation: More defensive than some

Avon has seen a major re-rating over the last 12 months and has been resilient in recent market turmoil, but not immune. That probably fairly reflects the current uncertain macroeconomic outlook and the defensive strategic position of the group in defence and dairy markets. We feel the greatest risk is the longer-term economic fallout that the current stimulus may have on future budget levels.

Estimate revisions

While it is not apparent from the table below, our EPS is marginally reduced by an increased finance charge due to increased capex and the additional consideration paid in FY20, hence the £4.3m increase in our adjusted net debt estimate (before adoption of IFRS 16). In FY21, earnings are increased by 12.9% as contract deliveries start in early calendar 2021. As we have assumed further supply contracts are awarded later in 2020, we have added $40m to revenues for FY21 achieving just below Avon Protection’s divisional margin. With a three-year sales value of $333m, we expect revenues to grow in FY22 and FY23. Of course, the contingency consideration progressively escalates to the maximum total of $25m as confirmed supply contacts are awarded, but we expect that additional investment to prove value creating for investors. There will be the second tranche of the additional $5m capex to absorb and we expect another $3m of contingency payment, so net cash is reduced at the year-end compared to our previous forecast, despite improving operational cash flows.

Exhibit 1: Avon Rubber revisions to earnings estimates

Year to September (£m)

2020e

2021e

 

Prior

New

% change

Prior

New

% change

Avon Protection

179.8

179.8

0.0%

201.7

233.6

15.8%

milkrite I InterPuls

53.2

53.2

0.0%

54.8

54.8

0.0%

Total Sales

233.0

233.0

0.0%

256.4

288.4

12.5%

 

 

 

 

 

 

EBITDA

47.3

47.4

0.2%

55.4

62.1

12.1%

 

 

 

 

 

 

Avon Protection

31.4

31.4

0.0%

38.5

44.1

14.6%

milkrite I InterPuls

8.1

8.1

0.0%

8.5

8.5

0.0%

Unallocated

(3.0)

(3.0)

0.0%

-3.1

(3.1)

0.0%

Adjusted EBITA

36.6

36.6

0.0%

44.0

49.6

12.8%

 

 

 

 

 

 

Adjusted PBT

35.4

35.4

0.0%

43.6

49.2

12.9%

 

 

 

 

 

 

EPS - adjusted fully diluted (p)

93.1

93.1

0.0%

114.7

129.5

12.9%

DPS (p)

27.1

27.1

0.0%

35.2

35.2

0.0%

Net debt/(cash)

4.4

8.7

97.1%

(16.4)

(12.1)

-25.9%

Source: Edison Investment Research estimates, all before adoption of IFRS 16

The company has indicated that the adoption of IFRS 16 will see the creation of a right-of-use asset of £7.0m and capitalised lease liabilities of £11.1m. Adjusting for a £0.7m increase in the deferred tax assets leads to a reduction in net assets on transition of £3.0m at the start of FY20. The adjustments to the P&L would have inflated EBITDA by £2.0m, but had only a marginal effect on adjusted net income and EPS.

We note that Avon Rubber essentially grew revenues through the financial crisis, albeit a smaller entity at the time. It still appears to be more defensively positioned in the near term than many other companies.

Exhibit 2: Financial summary

£000s

2018

2019

2020e

2021e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

165,500

179,300

232,976

288,375

Cost of Sales

(99,900)

(106,800)

(138,772)

(171,770)

Gross Profit

65,600

72,500

94,204

116,604

EBITDA

 

 

35,300

39,500

47,427

62,124

Operating Profit (before amort. and except.)

 

 

30,400

35,100

40,960

54,555

Intangible Amortisation

(3,100)

(3,800)

(4,345)

(4,918)

Operating profit (company definition)

27,300

31,300

36,615

49,637

Exceptionals

(5,600)

(17,700)

(8,000)

(6,300)

Other

(100)

(100)

(100)

(100)

Operating Profit

21,600

13,500

28,515

43,237

Net Interest

0

200

(1,159)

(331)

Profit Before Tax (norm)

 

 

27,200

31,400

35,356

49,206

Profit Before Tax (FRS 3)

 

 

21,600

13,700

27,356

42,906

Tax

(1,800)

600

(5,198)

(8,152)

Profit After Tax (norm)

23,500

28,000

28,638

39,857

Profit After Tax (FRS 3)

19,800

14,300

22,158

34,754

Average Number of Shares Outstanding (m)

30.5

30.5

30.5

30.5

EPS - normalised (p)

 

 

77.1

91.7

93.8

130.6

EPS - normalised & fully diluted (p)

 

 

76.6

90.9

93.1

129.5

EPS - (IFRS) (p)

 

 

64.9

46.9

72.6

113.9

Dividend per share (p)

16.0

20.8

27.1

35.2

Gross Margin (%)

39.6

40.4

40.4

40.4

EBITDA Margin (%)

21.3

22.0

20.4

21.5

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

18.4

19.6

17.6

18.9

BALANCE SHEET

Fixed Assets

 

 

64,100

56,700

131,971

129,826

Intangible Assets

41,500

35,300

59,180

55,971

Tangible Assets

22,600

21,400

72,791

73,855

Investments

0

0

0

0

Current Assets

 

 

102,000

117,000

109,157

100,616

Stocks

23,000

20,700

27,166

33,962

Debtors

24,200

35,400

34,067

42,167

Cash

46,600

48,400

35,425

11,987

Other

8,200

12,500

12,500

12,500

Current Liabilities

 

 

(41,400)

(36,600)

(91,191)

(57,550)

Creditors

(41,300)

(36,500)

(47,023)

(57,709)

Short term borrowings

(100)

(100)

(44,168)

159

Long Term Liabilities

 

 

(39,900)

(50,700)

(50,643)

(50,586)

Long term borrowings

0

0

0

0

Other long term liabilities

(39,900)

(50,700)

(50,643)

(50,586)

Net Assets

 

 

84,800

86,400

99,294

122,305

CASH FLOW

Operating Cash Flow

 

 

33,400

15,200

48,451

57,705

Net Interest

(200)

0

(1,159)

(331)

Tax

(1,800)

600

(5,198)

(8,152)

Capex

(8,900)

(7,900)

(18,683)

(15,842)

Acquisitions/disposals

5,100

0

(72,400)

(2,400)

Financing

(1,100)

(1,300)

(1,000)

(1,000)

Dividends

(4,100)

(5,400)

(7,055)

(9,090)

Other

(600)

600

0

0

Net Cash Flow

21,800

1,800

(57,043)

20,889

Opening net debt/(cash)

 

 

(24,700)

(46,500)

(48,300)

8,743

HP finance leases initiated

0

0

0

0

Other

0

0

0

(0)

Closing net debt/(cash)

 

 

(46,500)

(48,300)

8,743

(12,146)

Source: Company reports, Edison Investment Research estimates, all figures pre-adoption of IFRS 16


General disclaimer and copyright

This report has been commissioned by Avon Rubber and prepared and issued by Edison, in consideration of a fee payable by Avon Rubber. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Avon Rubber and prepared and issued by Edison, in consideration of a fee payable by Avon Rubber. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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