Environmental awareness

Avon Rubber 27 January 2016 Update

Avon Rubber

Environmental awareness

AGM trading update

Aerospace & defence

27 January 2016

Price

826p

Market cap

£256m

Net debt (£m) at 31 December 2015

10.0

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(17.7)

(27.5)

3.9

Rel (local)

(12.6)

(21.7)

17.5

52-week high/low

1,167p

711p

Business description

Avon Rubber designs, develops and manufactures products in the respiratory protection, defence (74% of 2015 sales) and dairy (26%) sectors. Its major contracts are with national security and safety organisations such as the DoD. 82% of sales are from the US and 18% from Europe.

Next event

Interim results

4 May 2016

Analyst

Roger Johnston

+44 (0)20 3077 5722

Avon Rubber is a research client of Edison Investment Research Limited

Avon Rubber’s AGM trading update has reconfirmed strong cash generation, but also highlighted a less favourable Q1 environment. With Dairy markets remaining soft as identified at the full year, we are taking a more cautious view on H1 results, leading to a c 4% downgrade to EPS. As usual, the timing of receipt and delivery of impact orders in Protection & Defence will also drive H1:H2 weighting. Longer-term growth opportunities, supported by product development, market expansion and acquisitions, remain and provide substantial upside opportunity.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

124.8

16.6

43.7

5.6

18.9

0.7

09/15

134.3

19.8

56.1

7.3

14.7

0.9

09/16e

150.6

20.5

54.7

9.5

15.1

1.2

09/17e

157.4

21.7

56.5

12.0

14.6

1.5

Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, IAS19 (R) charges and exceptional items.

Protection & Defence goes about its business

Protection & Defence has focused delivery on the core US DoD M50 programme as expected, while timing of impact order receipt and delivery, one of which the company expects to receive during H1, could alter the H1:H2 weighting. As such, this is business as usual in export markets. Integration of the Argus business, acquired in October 2015, has progressed rapidly and smoothly with manufacturing moved to the Melksham facility in December and US approvals currently being undertaken that are likely to benefit H2 results.

Dairy market softness continuing

The statement highlights that the environment in Dairy remains soft in Europe due to low milk prices driving a typical lengthening of consumable replacement cycles. This effect is exacerbated in the more capital-intensive InterPuls business, the integration of which has been positive since acquisition in August 2015. As a result, we are taking a prudent view on H1 dairy revenues, trimming by c 10%, equating to a c £1m easing of our Dairy FY16 PBT, which flows through to FY17. Even in such an environment, the group has continued to see encouraging levels in uptake of the Cluster Exchange service in both North American and European markets.

Valuation: Long-term value drivers remain

Our fair value eases to 1,065p/share (previously 1,110p) following the c 4% downgrade to FY16 and FY17 EPS estimates. Despite ongoing softness in the Dairy market, the long-term drivers across both divisions, as highlighted in our November 2015 Outlook note, remain intact. As such, we maintain our upside scenario analysis, which would equate to an updated indicative fair value of 1,310p/share (previously 1,355p/share). In addition, cash generation has also remained strong, with net debt reducing to £10.0m as at 31 December 2015 (30 September 2015: £13.2m) despite the £3.5m acquisition spend on Argus.

Exhibit 1: Financial summary

Year end 30 September

£'000s

2013

2014

2015

2016e

2017e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

124,851

124,779

134,318

150,556

157,433

Cost of Sales

(91,140)

(83,264)

(89,629)

(100,464)

(105,054)

Gross Profit

33,711

41,515

44,689

50,091

52,379

EBITDA (before amort. and except.)

 

 

20,443

23,303

25,225

28,065

31,033

Operating Profit (before amort. and except.)

 

 

14,223

17,003

20,215

20,956

22,041

Amortisation of Intangibles

(417)

(261)

(1,043)

(2,500)

(2,500)

Exceptionals

(383)

(2,017)

(604)

0

0

Other

(420)

(400)

318

(400)

(400)

Operating Profit

 

 

13,003

14,325

18,886

18,056

19,141

Net Interest

(347)

(274)

(147)

(300)

(150)

Other finance costs

(253)

(187)

(247)

(180)

(200)

Profit Before Tax (norm)

 

 

13,656

16,554

19,821

20,476

21,691

Profit Before Tax (FRS 3)

12,403

13,864

17,838

17,576

18,791

Tax

(3,566)

(3,053)

(2,672)

(3,954)

(4,228)

Tax adjustment

(122)

(450)

(253)

0

0

Profit After Tax (norm)

 

 

9,968

13,051

16,896

16,521

17,063

Profit After Tax (FRS 3)

8,837

10,811

15,166

13,621

14,563

Average Number of Shares Outstanding (m)

29.5

29.9

30.1

30.2

30.2

EPS - continuing, normalised (p)

 

 

33.8

43.7

56.1

54.7

56.5

EPS - continuing, FRS 3 (p)

 

 

30.0

36.2

50.4

45.1

48.2

DPS (p)

4.3

5.6

7.3

9.5

12.0

Gross Margin (%)

27%

33%

33%

33%

33%

EBITDA Margin (%)

16%

19%

19%

19%

20%

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

11%

14%

15%

14%

14%

BALANCE SHEET

Fixed Assets

 

 

36,928

36,815

74,095

73,618

73,758

Intangible Assets

16,541

17,240

41,309

42,220

43,250

Tangible Assets

20,387

19,575

28,212

26,824

25,933

Other

0

0

4,574

4,574

4,574

Current Assets

 

 

34,449

34,971

34,481

37,225

40,735

Stocks

13,374

12,887

17,123

17,773

18,899

Debtors

20,891

19,159

17,026

19,121

19,522

Cash

184

2,925

332

332

2,314

Assets held for sale

0

0

0

0

0

Current Liabilities

 

 

(23,369)

(26,453)

(27,178)

(27,660)

(28,612)

Creditors

(17,296)

(19,601)

(18,005)

(20,837)

(21,789)

Short term borrowings

0

0

(2,350)

0

0

Tax

(6,073)

(6,852)

(6,823)

(6,823)

(6,823)

Liabilities for assets held for sale

0

0

0

0

0

Long Term Liabilities

 

 

(27,312)

(20,317)

(39,194)

(35,676)

(27,622)

Long term borrowings

(11,059)

0

(11,143)

(7,625)

429

Deferred Tax

(2,977)

(2,315)

(9,734)

(9,734)

(9,734)

Retirement benefit obligations

(11,279)

(16,029)

(16,605)

(16,605)

(16,605)

Provisions

(1,997)

(1,973)

(1,712)

(1,712)

(1,712)

Other

0

0

0

0

0

Net Assets

 

 

20,696

25,016

42,204

47,507

58,259

CASH FLOW

Operating Cash Flow

14,708

25,004

20,446

27,353

27,557

Net Interest

(364)

(314)

(147)

(300)

(150)

Tax

(2,229)

(2,903)

(3,270)

(3,954)

(4,228)

Capex

(11,054)

(6,815)

(6,183)

(8,732)

(9,131)

Acquisitions/disposals

(437)

(31)

(21,228)

(3,500)

0

Equity financing

(1,765)

0

(1,152)

(1,500)

(2,000)

Dividends

(1,132)

(1,422)

(1,859)

(2,198)

(2,870)

Net Cash Flow

(2,273)

13,519

(13,393)

7,168

9,178

Opening net (debt)/cash

 

 

(8,725)

(15,937)

2,925

(13,161)

(7,293)

Cash FX effect

123

281

97

0

0

Discontinued operations / relocation

0

0

0

(1,300)

0

Debt FX and Other

(5,062)

5,062

(2,790)

0

0

Closing net (debt)/cash

 

 

(15,937)

2,925

(13,161)

(7,293)

1,885

Source: Company accounts, Edison Investment Research

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Germany

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United Kingdom

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