Encouraging H219 momentum

Avon Rubber 16 September 2019 Update
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Avon Rubber

Encouraging H219 momentum

Pre-close trading update

Aerospace & defence

16 September 2019

Price

1678p

Market cap

£522m

US$1.25/£

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

6.6

22.5

20.7

Rel (local)

4.2

21.6

19.8

52-week high/low

1816p

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 were from the US.

Next events

FY19 results

13 November 2019

Analyst

Andy Chambers

+44 (0)20 3681 2525

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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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


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 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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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 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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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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