Avon Rubber |
Encouraging H219 momentum |
Pre-close trading update |
Aerospace & defence |
16 September 2019 |
Share price performance
Business description
Next events
Analyst
Avon Rubber is a research client of Edison Investment Research Limited |
In a pre-close statement ahead of Avon Rubber’s FY19 year end, management has indicated the strong momentum in Avon Protection continued through H219. Group performance was also supported by an improved trading environment for milkrite | InterPuls and favourable FX tailwinds. As a result, we have increased our FY19 sales growth estimate to 8% which, after a c £2m one-off non cash tax provision release, leads to a 12.4% increase in our EPS estimate. As the company enters FY20, the momentum is encouraging and should be enhanced when the 3M deal is completed. The shares have performed well since the proposed accretive deal was announced and warrant a premium to UK defence peers.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
159.2 |
25.9** |
83.3** |
12.3 |
20.1 |
0.7 |
09/18 |
165.5 |
27.2 |
76.5 |
16.0 |
21.9 |
1.0 |
09/19e |
178.6 |
30.5 |
88.4 |
20.8 |
19.0 |
1.2 |
09/20e |
189.5 |
33.5 |
88.2 |
27.1 |
19.0 |
1.6 |
Note: *PBT and EPS are normalised, fully diluted and excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated for AEF disposal.
Strong H219 drives a modest upgrade
After the start of deliveries of the new US mask systems contracts won in early 2019, Avon Protection’s Military segment enjoyed a strong H219 performance. This was enhanced by the delivery of the $16.6m mask contract for the rest of the world customer announced in April. The strength more than offset softer demand in the US for Fire and Law Enforcement products. Following the weak Q119, the improvements in dairy markets seen in Q219 have continued through H219 and have allowed the expected flat year for milkrite | Interpuls to be achieved. Weaker sterling in Q419 increased the translation benefit from currency to around 4% for FY19. As a result FY19 group sales are expected to grow 8% compared to our prior assumption of 6.5%, and we have raised our FY19 estimates accordingly. One modest negative is in cash flow as the overseas mask invoicing extended over the year end. We expect the payments to be received in Q120. In addition, £2m was expensed against initial 3M ballistic protection deal costs.
3M deal should add to organic development
The improved dairy performance should add to the positive momentum expected in Avon Protection in FY20. We expect Military growth to be augmented by improved volumes for the Fire and Law Enforcement segments as the issues constraining FY19 wane. If current FX rates are maintained there should also be a more modest tailwind in FY20. The initial contribution from the 3M ballistic protection assets being acquired should further expand FY20 estimates.
Valuation: Justified premium to peers
The FY20 P/E ratio of 19.0x should drop significantly when the enhancement of the purchase from 3M is included following completion in H120. The stock would still be trading at a justifiable premium to UK defence peers given the growth being delivered accompanied by the progressive dividend policy.
Estimates upgraded modestly
With modestly higher than anticipated sales growth and the expected improvement in EBITDA margins, we increase our FY19 PBT estimate by 2.3%. At the EPS level there is a one-off tax non cash provision release worth around £2m (or 6.5p per share) which reduces the effective tax rate to 11% before reverting to more normal rates in FY20. As a result our FY19 EPS estimate rises by 12.4% to 88.4p. The higher FY19 trading base drives a modest improvement in our FY20 forecasts with EPS increased by 2.2%. The weaker expected cash performance in FY19 should reverse in FY20 leaving our net cash expectation at the end of the two-year forecast period almost unchanged.
As is our normal practice, we will incorporate the acquisition of the 3M ballistic protection assets in our estimates when the deal has completed. It is expected to significantly enhance returns from the point of initial consolidation (see our note Purchase of 3M’s ballistic protection business).
Exhibit 1: Avon Rubber earnings estimates revisions
Year to September (£000s) |
2019e |
2019e |
|
2020e |
2020e |
|
|
Prior |
New |
% change |
Prior |
New |
% change |
Avon Protection |
125,535 |
127,849 |
1.8% |
134,322 |
136,798 |
1.8% |
milkrite I InterPuls |
50,716 |
50,716 |
0.0% |
52,727 |
52,727 |
0.0% |
Total sales |
176,250 |
178,564 |
1.3% |
187,049 |
189,525 |
1.3% |
|
|
|
|
|
|
|
EBITDA |
38,772 |
39,548.6 |
2.0% |
42,203 |
43,063.2 |
2.0% |
|
|
|
|
|
|
|
Avon Protection |
23,852 |
24,547 |
2.9% |
26,223 |
26,987 |
2.9% |
milkrite I InterPuls |
8,075 |
8,075 |
0.0% |
8,563 |
8,563 |
0.0% |
Unallocated |
(2,195) |
(2,195) |
0.0% |
(2,252) |
(2,252) |
0.0% |
Underlying EBITA |
29,732 |
30,427 |
2.3% |
32,534 |
33,299 |
2.3% |
|
|
|
|
|
|
|
Underlying PBT |
29,832 |
30,527 |
2.3% |
32,755 |
33,489 |
2.2% |
|
|
|
|
|
|
|
EPS – underlying continuing (p) |
78.6 |
88.4 |
12.4% |
86.3 |
88.2 |
2.2% |
DPS (p) |
20.8 |
20.8 |
0.0% |
27.1 |
27.1 |
0.0% |
Net debt/(cash) |
(61,886) |
(49,080) |
-20.7% |
(77,731) |
(77,038) |
-0.9% |
Source: Edison Investment Research estimates
Exhibit 2: Financial summary
£000s |
2017 |
2018 |
2019e |
2020e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
159,200 |
165,500 |
178,564 |
189,525 |
Cost of Sales |
(97,600) |
(99,900) |
(107,786) |
(114,402) |
||
Gross Profit |
61,600 |
65,600 |
70,778 |
75,123 |
||
EBITDA |
|
|
36,300 |
35,300 |
39,549 |
43,063 |
Operating Profit (before amort. and except.) |
|
|
30,300 |
30,400 |
34,156 |
37,395 |
Intangible Amortisation |
(4,200) |
(3,100) |
(3,729) |
(4,096) |
||
Operating profit (company definition) |
26,100 |
27,300 |
30,427 |
33,299 |
||
Exceptionals |
(7,000) |
(5,700) |
(6,300) |
(4,300) |
||
Other |
(33) |
(100) |
(100) |
(99) |
||
Operating Profit |
19,067 |
21,500 |
24,027 |
28,900 |
||
Net Interest |
(200) |
0 |
200 |
290 |
||
Profit Before Tax (norm) |
|
|
25,867 |
27,200 |
30,527 |
33,490 |
Profit Before Tax (FRS 3) |
|
|
18,867 |
21,500 |
24,227 |
29,190 |
Tax |
2,900 |
(1,800) |
(2,676) |
(5,565) |
||
Profit After Tax (norm) |
25,502 |
23,500 |
27,169 |
27,126 |
||
Profit After Tax (FRS 3) |
21,767 |
19,700 |
21,551 |
23,625 |
||
Average Number of Shares Outstanding (m) |
30.4 |
30.5 |
30.5 |
30.5 |
||
EPS - normalised (p) |
|
|
83.3 |
76.5 |
88.4 |
88.2 |
EPS - (IFRS) (p) |
|
|
71.5 |
64.6 |
70.6 |
77.4 |
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 |
22.1 |
22.7 |
||
Operating Margin (before GW and except.) (%) |
19.0 |
18.4 |
19.1 |
19.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
66,700 |
64,100 |
61,099 |
58,021 |
Intangible Assets |
40,400 |
41,500 |
40,713 |
39,930 |
||
Tangible Assets |
26,300 |
22,600 |
20,386 |
18,091 |
||
Investments |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
80,500 |
102,000 |
120,021 |
139,819 |
Stocks |
21,800 |
23,000 |
25,064 |
26,868 |
||
Debtors |
23,800 |
24,200 |
37,677 |
27,713 |
||
Cash |
26,500 |
46,600 |
49,080 |
77,038 |
||
Other |
8,400 |
8,200 |
8,200 |
8,200 |
||
Current Liabilities |
|
|
(39,000) |
(41,400) |
(44,188) |
(46,509) |
Creditors |
(37,200) |
(41,300) |
(44,188) |
(46,509) |
||
Short term borrowings |
(1,800) |
(100) |
(0) |
(0) |
||
Long Term Liabilities |
|
|
(52,600) |
(39,900) |
(37,838) |
(37,777) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(52,600) |
(39,900) |
(37,838) |
(37,777) |
||
Net Assets |
|
|
55,600 |
84,800 |
99,094 |
113,554 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
29,754 |
33,400 |
20,895 |
51,102 |
Net Interest |
(154) |
(200) |
0 |
200 |
||
Tax |
2,900 |
(1,800) |
(2,676) |
(5,565) |
||
Capex |
(5,500) |
(8,900) |
(9,221) |
(9,786) |
||
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 |
2,580 |
27,958 |
||
Opening net debt/(cash) |
|
|
(1,996) |
(24,700) |
(46,500) |
(49,080) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
(0) |
(0) |
||
Closing net debt/(cash) |
|
|
(24,700) |
(46,500) |
(49,080) |
(77,038) |
Source: Company accounts, Edison Investment Research estimates
|
|