Hitting the numbers

Avon Rubber 15 September 2017 Update
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Avon Rubber

Hitting the numbers

Pre-close statement

Aerospace & defence

15 September 2017

Price

950p

Market cap

£295m

$1.29/£

Net cash (£m) at 31 March 2017

12.6

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.0)

(6.3)

0.5

Rel (local)

(4.3)

(4.1)

(8.5)

52-week high/low

1,119p

930p

Business description

Avon Rubber designs, develops and manufactures products in the respiratory protection, defence (71% of 2016 sales) and dairy (29%) sectors. Its major contracts are with national security and safety organisations such as the DoD. 86% of sales are from the US and 14% are from Europe.

Next events

FY17 results

15 November 2017

Analysts

Roger Johnston

+44 (0)20 3077 5722

Annabel Hewson

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

Avon Rubber’s pre-close has confirmed that the group will meet market expectations and that performance in H217 has continued apace. With positive mix effects in Protection & Defence and continued strengthening in Dairy, we believe that the eventual revenue and margin mix may alter slightly but that our profit levels will be achieved. With CEO Paul McDonald signalling continued confidence into 2018 and with further medium-term product developments to come through in both divisions, we continue to view Avon as delivering in the short and medium term.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/15

134.3

19.8

56.1

7.3

16.9

0.8

09/16

142.9

21.6

74.2

9.5

12.8

1.0

09/17e

168.9

25.0

66.6

11.0

14.3

1.2

09/18e

178.7

26.9

71.4

13.0

13.3

1.4

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

Positive trends in both divisions

The pre-close statement showed that both the Protection & Defence (P&D) and Dairy divisions continued to progress positively. In P&D, 152,000 mask systems and 144,000 spare filter pairs are expected to be delivered, while the flexibility in the group means it will be able to fulfil the May 2017 order for 37,000 FM50 general purpose masks in the current financial year, with a consequential benefit to mix. Likewise, the supportive market environment in Dairy has allowed the positive growth trends seen in the division to continue into H2 with a particularly pleasing performance from InterPuls, which had previously been more affected by capital spend delays in the sector.

Delivering profit, cash and embedded growth

Avon has again highlighted its ability to deliver consistently, both in terms of profit and strong cash generation. With recent years’ investments also set to drive further growth over the coming years, we maintain our view that Avon has the market position, product portfolio and ambition to further accelerate its growth through organic and inorganic means. The confirmation of trading in line with expectations is positive in our view and demonstrates the robust nature of the group, even during the period of management change. We expect the new management team now in place to progressively stamp its own authority and signature on the group.

Valuation: Opportunity following pause?

Following a period of consolidation, Avon Rubber is currently trading on just 13.3x FY18e EPS compared to its aerospace and defence peers, which are trading on an average of 17.1x. We believe that the confirmation of in-line trading at the pre-close, in conjunction with the higher than average growth rates, should justify a return to premium ratings, as previously witnessed. With confidence signalled in the order pipeline and further growth prospects, which we will revisit alongside results, we continue to believe that Avon has further medium-term upside earnings potential.

Exhibit 1: Financial summary

Year end 30 September

£000s

2013

2014

2015

2016

2017e

2018e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

124,851

124,779

134,318

142,884

168,853

178,654

Cost of Sales

(91,140)

(83,264)

(88,618)

(90,159)

(106,545)

(112,730)

Gross Profit

33,711

41,515

45,700

52,725

62,308

65,924

EBITDA

 

 

20,440

23,164

26,586

30,808

35,718

36,873

Operating Profit (before amort. and except.)

 

 

14,223

17,003

20,215

21,763

25,190

27,055

Amortisation of Intangibles

(417)

(261)

(1,043)

(3,307)

(3,000)

(3,024)

Exceptionals

(383)

(2,017)

(604)

(506)

0

0

Other

(420)

(400)

318

(320)

(400)

(400)

Operating Profit

 

 

13,003

14,325

18,886

17,630

21,790

23,631

Net Interest

(347)

(274)

(147)

(154)

(150)

(150)

Other finance costs

(253)

(187)

(247)

(33)

0

0

Profit Before Tax (norm)

 

 

13,656

16,554

19,821

21,576

25,040

26,905

Profit Before Tax (FRS 3)

12,403

13,864

17,838

16,801

21,640

23,481

Tax

(3,566)

(3,053)

(2,672)

1,824

(4,869)

(5,283)

Tax adjustment

(122)

(450)

(253)

(924)

0

0

Profit After Tax (norm)

 

 

9,968

13,051

16,896

22,476

20,171

21,622

Profit After Tax (FRS 3)

8,837

10,811

15,166

18,625

16,771

18,198

Average Number of Shares Outstanding (m)

29.5

29.9

30.1

30.3

30.3

30.3

EPS - normalised (p)

 

 

33.8

43.7

56.1

74.2

66.6

71.4

EPS - continuing, FRS 3 (p)

 

 

30.0

36.2

50.4

61.5

55.4

60.1

DPS (p)

4.3

5.6

7.3

9.5

11.0

13.0

Gross Margin (%)

27%

33%

34%

37%

37%

37%

EBITDA Margin (%)

16%

19%

20%

22%

21%

21%

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

11%

14%

15%

15%

15%

15%

BALANCE SHEET

Fixed Assets

 

 

36,928

36,815

74,095

85,244

81,639

79,146

Intangible Assets

16,541

17,240

41,309

47,357

47,734

48,283

Tangible Assets

20,387

19,575

28,212

30,112

26,130

23,088

Other

0

0

4,574

7,775

7,775

7,775

Current Assets

 

 

34,449

34,971

34,481

45,111

59,828

78,330

Stocks

13,374

12,887

17,123

20,648

19,811

20,960

Debtors

20,891

19,159

17,026

19,968

20,938

22,153

Cash

184

2,925

332

4,495

19,080

35,216

Assets held for sale

0

0

0

0

0

0

Current Liabilities

 

 

(23,369)

(26,453)

(27,178)

(36,641)

(32,652)

(33,970)

Creditors

(17,296)

(19,601)

(18,005)

(24,185)

(22,695)

(24,013)

Short term borrowings

0

0

(2,350)

(2,499)

0

0

Tax

(6,073)

(6,852)

(6,823)

(9,212)

(9,212)

(9,212)

Other

0

0

0

(745)

(745)

(745)

Long Term Liabilities

 

 

(27,312)

(20,317)

(39,194)

(51,713)

(51,713)

(51,713)

Long term borrowings

(11,059)

0

(11,143)

0

0

0

Deferred Tax

(2,977)

(2,315)

(9,734)

(10,007)

(10,007)

(10,007)

Retirement benefit obligations

(11,279)

(16,029)

(16,605)

(39,951)

(39,951)

(39,951)

Provisions

(1,997)

(1,973)

(1,712)

(1,755)

(1,755)

(1,755)

Other

0

0

0

0

0

0

Net Assets

 

 

20,696

25,016

42,204

42,001

57,102

71,793

CASH FLOW

Operating Cash Flow

14,708

25,004

20,446

31,680

32,896

34,225

Net Interest

(364)

(314)

(147)

(309)

(150)

(150)

Tax

(2,229)

(2,903)

(3,270)

(1,031)

(4,869)

(5,283)

Capex

(11,054)

(6,815)

(6,183)

(6,838)

(6,923)

(7,325)

Acquisitions/disposals

(437)

(31)

(21,228)

(3,250)

0

0

Equity financing

(1,765)

0

(1,152)

(1,812)

(1,000)

(2,000)

Dividends

(1,132)

(1,422)

(1,859)

(2,430)

(2,870)

(3,330)

Net Cash Flow

(2,273)

13,519

(13,393)

16,010

17,084

16,136

Opening net (debt)/cash

 

 

(8,725)

(15,937)

2,925

(13,161)

1,996

19,080

Cash FX effect

123

281

97

(853)

0

0

Discontinued operations / relocation

0

0

0

0

0

0

Debt FX and Other

(5,062)

5,062

(2,790)

0

0

0

Closing net (debt)/cash

 

 

(15,937)

2,925

(13,161)

1,996

19,080

35,216

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avon Rubber and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avon Rubber and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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