Avon Rubber — Orders support H2 momentum into FY20

Avon Technologies (LSE: AVON)

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Avon Rubber — Orders support H2 momentum into FY20

Guidance for FY19 is maintained after a slow H119 as recent major multi-year mask orders commence delivery in H219, accelerating Avon Protection’s growth and more than compensating for the weaker than expected milkrite | InterPuls performance. However, even here a rebound in H219 will further skew the half-yearly split. Despite the divisional mix shift, our overall estimates remain unchanged. While H119 was tough, the outlook is promising as the company continues to grow the core, focus on selective new product development and search for M&A opportunities. In our opinion, the full year progression warrants the premium rating Avon enjoys, but H2 execution and momentum into FY20 is key.

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Written by

Avon Rubber

Orders support H2 momentum into FY20

H119 results

Aerospace & defence

2 May 2019

Price

1,436p

Market cap

£445m

US$1.30/£1

Net cash (£m) at 31 March 2019

46.8

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.1

18.7

5.6

Rel (local)

8.7

12.8

7.7

52-week high/low

1475p

1180p

Business description

Avon Rubber designs, develops and manufactures products in the protection (70% of 2018 sales) and dairy (30%) sectors. Its major contracts are with national security organisations such as the US DoD. Over 70% of 2018 sales are from the US.

Next events

Pre-close statement

16 September 2019

FY19 prelims

13 November 2019

Analyst

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

Guidance for FY19 is maintained after a slow H119 as recent major multi-year mask orders commence delivery in H219, accelerating Avon Protection’s growth and more than compensating for the weaker than expected milkrite | InterPuls performance. However, even here a rebound in H219 will further skew the half-yearly split. Despite the divisional mix shift, our overall estimates remain unchanged. While H119 was tough, the outlook is promising as the company continues to grow the core, focus on selective new product development and search for M&A opportunities. In our opinion, the full year progression warrants the premium rating Avon enjoys, but H2 execution and momentum into FY20 is key.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

159.2

25.9**

83.3**

12.3

17.2

0.9

09/18

165.5

27.2

76.5

16.0

18.8

1.1

09/19e

176.3

29.8

78.6

20.8

18.3

1.4

09/20e

187.0

32.8

86.3

27.1

16.6

1.9

Note: *PBT and EPS are normalised, fully diluted and excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated for AEF disposal.

H1 performance challenged

As previously noted by management, a variety of factors served to depress performance in H119, with both divisions delivering reduced profitability. In Avon Protection, only Military revenues showed progress boosted by sales to the Rest of the World. DoD sales declined due to a fall in low-margin M50 volumes and adverse phasing of spares and accessories, which still grew as a proportion of divisional sales, reducing margin. The Law Enforcement and Fire segments were depressed by the prolonged partial shutdown of the US government. Dairy market conditions saw lower milk prices in Q119 adversely affected milkrite | InterPuls, although milk prices and sentiment improved through Q219. Overall H119 group revenues declined 5.3% to £73.6m, and adjusted operating profit fell 25% to £8.7m, a £3.9m decline.

Sharp improvement is expected

The good news came in the form of burgeoning Military orders at Avon Protection, stronger opening backlogs elsewhere for H219 including encouraging signs of an H219 recovery in milkrite | InterPuls, a strong financial position with £46.8m of net cash at the period end, and the 30% hike in the interim dividend. Management maintains expectations that Military sales should accelerate in H219, with stronger margins due to better pricing for new product volumes. We expect DoD sales to rise around 25% in H219 compared to H119, with a continued strong performance in the Rest of the World. The Law Enforcement, Fire and dairy segments also rebound and, while we have shifted our divisional mix, our estimates are maintained.

Valuation: H2 backlog delivery is key for premium

Avon is currently trading on an FY20e P/E rating of 16.6x, a significant premium to many UK peers. However, the momentum of the H219 recovery should provide a basis for growth in FY20 as multi-year contracts increase volumes and margins. The dividend policy designed to reduce cover over the cycle is also supportive.

H119 results

At face value, H119 was an extremely challenging period, with softer dairy markets affecting Q119, and the prolonged US government shutdown compounding what was already a difficult period for Avon Protection. Management confidence of a sharp improvement in H219 to meet its current expectations was reflected in the further 30% increase in the interim dividend.

Orders received £94.9m (H118: £88.3m), up 7.5% or 2.1% at constant currency, and representing a book to bill ratio of 1.3x.

Closing order book up 45.6% at £59.1m, 38.2% at constant currency.

Reported H119 revenues of £73.6m (H118: £77.7m), down 5.3%, or 8.7% at constant currency.

Adjusted H119 operating profit of £8.7m (H118: £11.6m) down 25.0%, a fall of 28.0% on constant currency.

Adjusted H119 profit before tax down 24.1% at of £8.8m (H118: £11.6m), down 27.0% at constant currency

Adjusted H119 EPS fell 29.3% to 23.2p (H118: 32.8p) or 31.6% lower at constant currency.

Interim DPS was 6.94p (H118: 5.34p), an increase of 30.0%.

Net cash £46.8m up £0.3m compared to FY18 year end.

Exhibit 1: H1 results summary

Half year to March (£m)

H117

H118

H119

% change H119 vs H118

Reported

Constant FX

Order intake

Avon Protection

65.8

64.2

69.3

7.9%

1.4%

milkrite I InterPuls

25

24.1

25.6

6.2%

3.8%

Total orders

90.8

88.3

94.9

7.5%

2.1%

Revenues

Avon Protection

53.7

53.1

49.3

(7.2%)

(10.8%)

Of which

Military

32.9

27.3

30.9

13.2%

7.2%

Law Enforcement

12.5

18.6

11.7

(37.1%)

(38.1%)

Fire

8.3

7.2

6.7

(6.9%)

(11.4%)

milkrite I InterPuls

25.1

24.6

24.3

(1.2%)

(2.6%)

Of which

Interface

18.2

17.2

17.4

1.2%

(0.9%)

Precision, Control & Intelligence

4.8

4.8

4.3

(10.4%)

(9.5%)

Farm Services

2.1

2.6

2.6

0.0%

(1.4%)

Total revenues

78.8

77.7

73.6

(5.3%)

(8.7%)

Adjusted operating profit

Avon Protection

7.6

9.2

6.5

(29.3%)

(33.1%)

milkrite I InterPuls

3.3

3.6

3.3

(8.3%)

(7.8%)

Other

-1.3

-1.2

-1.1

(8.3%)

6.7%

Total adjusted operating profit

9.6

11.6

8.7

(25.0%)

(28.0%)

Avon Protection

14.2%

17.3%

13.2%

(23.9%)

milkrite I InterPuls

13.1%

14.6%

13.6%

(7.2%)

Total operating profit margin

12.2%

14.9%

11.8%

(20.8%)

EPS adjusted (p)

28.6

32.8

23.2

(29.3)%

(31.6%)

DPS (p)

4.11

5.34

6.94

30.0%

30.0%

Net cash

12.6

39.1

46.8

19.7%

Source: Company reports

As the company pursues its three-pronged strategy of growing the core organically, augmented by selective new product development, bolstered by appropriate M&A, encouraging signs came from the increase in the order intake, extending backlogs and a modest cash inflow during the period.

In Avon Protection, the order development was particularly pronounced with a backlog up 40% at £55.4m following another strong period of order intake of £69.3m. The Military segment accounted for much of the divisional backlog build, rising £14.1m to £44.2m. Military sales made good progress in H119 despite lower DoD sales of £22.9m (H118: £25.3m), with the fall more than compensated for by the Rest of the World segment, where revenues quadrupled year-on-year to £8m.

The DoD revenue reduction reflected a fall in low-margin volumes of M50 mask systems to 76,000 in H119 from 79,000 in H118 and an adverse phasing of spares and accessories. The M50 still accounted for a higher proportion of Avon Protection’s H119 sales due to declines elsewhere and, as a result, the H119 margin was also depressed. The new volumes for recently signed contracts for the M53A1 and M69 mask systems and other contracts should accelerate sales dramatically in H219, with improved commercial pricing under the new multi-year contracts. Combined with a recovery in Law Enforcement and Fire activity, we expect a strong uplift in divisional margins.

The company remains in active dialogue with the US DoD for the M50 replenishment phase. Law Enforcement and Fire were both adversely affected by the extended US government shutdown, which delayed domestic US order placements as well as export licensing. Sales have been deferred into H219, with both segments seeing encouraging backlog progression.

Order intake during the period was further supported by subsequent order awards, and deliveries of most of these major multi-year contracts commence in H219. Higher margins are anticipated on the increased volumes and should be boosted by the new product sales.

milkrite I InterPuls faced a difficult half year. Weaker milk prices in Q119 adversely affected all three business segments, as negative sentiment among farmers resulted in deferred investment. Moderate production increases and stable feed prices resulted in a recovery in milk prices through Q219 and improved the adverse customer sentiment. Again, the opening order position for H219 provides encouragement for a recovery and we now expect the shortfall in H119 to be recovered in H219.

Outlook

Exhibit 2: Earnings estimates revisions

Year to September (£m)

2019e

2020e

 

Prior

New

% change

Prior

New

% change

Avon Protection

125.0

125.5

0.5%

133.7

134.3

0.5%

milkrite I InterPuls

51.3

50.7

-1.1%

53.4

52.7

-1.2%

Total Sales

176.3

176.3

0.0%

187.0

187.0

0.0%

EBITDA

38.7

38.8

0.1%

42.2

42.2

0.0%

Avon Protection

23.5

23.8

1.5%

25.9

26.2

1.3%

milkrite I InterPuls

8.5

8.1

-4.6%

9.0

8.6

-4.6%

Unallocated

(2.3)

(2.2)

-3.1%

(2.3)

(2.3)

-3.5%

Underlying EBITA

29.7

29.7

0.1%

32.5

32.5

0.0%

Underlying PBT

29.8

29.8

0.0%

32.8

32.8

0.0%

EPS - underlying continuing (p)

78.6

78.6

0.0%

86.3

86.3

0.0%

DPS (p)

20.8

20.8

0.0%

27.1

27.1

0.0%

Net debt/(cash)

(61.9)

(61.9)

0.0%

(77.7)

(77.7)

0.0%

Source: Edison Investment Research estimates

Management is confident of a rebound in performance in most segments during H219 and maintains the view that its expectations will be met. Successfully delivering contracted volumes from backlog will be key to the H219 performance improvement, but should sustain improvement into FY20. Our divisional split has been tweaked to reflect the softer dairy performance for FY19 as a whole. The sharp improvement in Avon Protection should compensate for that weaker expectation. It should be driven by initial volumes with higher margins on the recent Military contracts, as well as rebounding US government sales for Law Enforcement and Fire. Our headline numbers thus remain unchanged as shown below.

Exhibit 3: Financial summary

£000s

2017

2018

2019e

2020e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

159,200

165,500

176,250

187,049

Cost of Sales

(97,600)

(99,900)

(106,389)

(112,907)

Gross Profit

61,600

65,600

69,861

74,141

EBITDA

 

 

36,300

35,300

38,772

42,203

Operating Profit (before amort. and except.)

 

 

30,300

30,400

33,449

36,609

Intangible Amortisation

(4,200)

(3,100)

(3,718)

(4,075)

Operating profit (company definition)

26,100

27,300

29,732

32,534

Exceptionals

(7,000)

(5,700)

(4,300)

(4,300)

Other

(33)

(100)

(100)

(99)

Operating Profit

19,067

21,500

25,332

28,135

Net Interest

(200)

0

200

321

Profit Before Tax (norm)

 

 

25,867

27,200

29,832

32,756

Profit Before Tax (FRS 3)

 

 

18,867

21,500

25,532

28,456

Tax

2,900

(1,800)

(4,870)

(5,426)

Profit After Tax (norm)

25,502

23,500

24,164

26,532

Profit After Tax (FRS 3)

21,767

19,700

20,662

23,031

Average Number of Shares Outstanding (m)

30.4

30.5

30.5

30.5

EPS - normalised (p)

 

 

83.3

76.5

78.6

86.3

EPS - (IFRS) (p)

 

 

71.5

64.6

67.7

75.5

Dividend per share (p)

12.3

16.0

20.8

27.1

Gross Margin (%)

38.7

39.6

39.6

39.6

EBITDA Margin (%)

22.8

21.3

22.0

22.6

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

19.0

18.4

19.0

19.6

BALANCE SHEET

Fixed Assets

 

 

66,700

64,100

61,060

57,950

Intangible Assets

40,400

41,500

40,646

39,800

Tangible Assets

26,300

22,600

20,414

18,149

Investments

0

0

0

0

Current Assets

 

 

80,500

102,000

120,597

139,791

Stocks

21,800

23,000

24,739

26,517

Debtors

23,800

24,200

25,772

27,351

Cash

26,500

46,600

61,886

77,723

Other

8,400

8,200

8,200

8,200

Current Liabilities

 

 

(39,000)

(41,400)

(43,615)

(45,894)

Creditors

(37,200)

(41,300)

(43,615)

(45,901)

Short term borrowings

(1,800)

(100)

(0)

7

Long Term Liabilities

 

 

(52,600)

(39,900)

(39,838)

(39,777)

Long term borrowings

0

0

0

0

Other long term liabilities

(52,600)

(39,900)

(39,838)

(39,777)

Net Assets

 

 

55,600

84,800

98,205

112,071

CASH FLOW

Operating Cash Flow

 

 

29,754

33,400

35,776

38,721

Net Interest

(154)

(200)

0

200

Tax

2,900

(1,800)

(4,870)

(5,426)

Capex

(5,500)

(8,900)

(9,101)

(9,659)

Acquisitions/disposals

0

5,100

0

0

Financing

(1,000)

(1,100)

(1,000)

(1,000)

Dividends

(3,200)

(4,100)

(5,419)

(6,992)

Other

(96)

(600)

0

0

Net Cash Flow

22,704

21,800

15,386

15,844

Opening net debt/(cash)

 

 

(1,996)

(24,700)

(46,500)

(61,886)

HP finance leases initiated

0

0

0

0

Other

0

0

(0)

0

Closing net debt/(cash)

 

 

(24,700)

(46,500)

(61,886)

(77,731)

Source: Company reports, Edison Investment Research

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 Edison analyst 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.

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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.

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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.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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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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Fluence Corporation — Exceptional bookings growth

In a typically quiet quarter, Fluence enjoyed exceptional bookings. Aside from the US$188m CES (custom engineered solution) win in Ivory Coast, it also secured a $20m contract in Egypt and a further ITEST deal. Revenue rose 20% y-o-y and the gross cash balance was $24m ($14.7m outflow). Forecasting CES deals are hard and we trim FY19 sales by 10% to reflect a more cautious view on further big wins boosting FY19 numbers, but the company still expects EBITDA breakeven during Q419 and FY20 estimates are substantively unchanged. The share price implies an FY20 P/E of 8.6x.

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