More Protection enhances EPS

Avon Rubber 3 January 2020 Update
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Avon Rubber

More Protection enhances EPS

Completion of acquisition

Aerospace & defence

3 January 2020

Price

2,080p

Market cap

£634m

US$1.32/£

Net cash (£m) at 30 September 2019

48.3

Shares in issue

30.5m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

24.7

63.1

Rel (local)

0.0

15.5

41.9

52-week high/low

2,150p

1,180p

Business description

Avon Rubber designs, develops and manufactures products in the protection (72% of 2019 sales) and dairy (28%) sectors. Its major contracts are with national security organisations such as the US DOD. Over 70% of 2019 sales were from the US.

Next events

AGM

30 January 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

Having gained CFIUS approval on 20 December 2019, Avon has completed the $91m acquisition of 3M’s ballistic protection assets announced in August. We update our forecasts for the acquisition, consolidated from 2 January 2020. Our FY20 EPS estimate is enhanced by 5% and, allowing for the full $5m annual benefit of cost synergies, FY21e EPS increase by 20%. The resultant FY21e P/E rating of 18.1x represents a 20% premium to UK defence peers, which we feel is justified by the high returns, strong cash generation and consistent execution of the growth strategy.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/18

165.5

27.2

76.6

16.0

27.2

0.8

09/19

179.3

31.4

90.9

20.8

22.9

1.0

09/20e

233.0

35.4

93.1

27.1

22.3

1.3

09/21e

256.4

43.6

114.7

35.2

18.1

1.7

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

A strategically aligned deal

Avon Rubber has now completed its largest strategic investment to date, the purchase of the ballistic protection assets formerly owned by 3M for an initial $91m. The business being bought includes the Ceradyne brand helmets and body armour activity, which predominantly services the important US defence and security market, especially the US DOD where Avon Protection already has strong positions in mask systems. The deal is consistent with the three-pronged growth strategy that includes targeted acquisitions, adding a market-leading business that extends Avon Protection’s portfolio. Avon should be able to leverage its well established international sales network to augment growth.

Value creating from FY21

We expect the deal to be immediately earnings enhancing before an indicated $10m exceptional cash charge against integration costs, which should generate $5m of annual cost savings from FY21, increasing EBITDA margins of the acquired business to around 18.5% from 12.6% in 2018. The deal is thus expected to be value creating in its first full year in FY21. We have assumed low single-digit sales growth for the business in the medium term, which has annual sales of around £65m. The initial acquisition cost of $91m (£70m) could increase by a further $25m depending on the outcome of tenders for legacy products. We expect any additional business these generate to further enhance returns from the deal.

Valuation: Rating discounts enhancement

The market has already discounted the benefits from the acquisition, with the share price having risen by almost 35% since it was first announced. The organic progression of the group in both protection and dairy markets was confirmed by the FY19 results in November which, combined with a stronger cash flow expected in FY20, warrants the premium rating against its UK defence peers. We expect management to provide a trading update at the AGM later this month.

Earnings revisions

We have consolidated the ballistic protection business in Avon Protection for nine months in FY20 and for the whole of FY21. Revenues added are around £48m in FY20 and £62m in FY21. We assume the cash costs of integration of c $10m are treated as both exceptional and capitalised investment in IT assets in FY20, but will generate annual cost savings of $5m from FY21, resulting in a £10m contribution to group EBITDA in its first full year. The £70m ($91m) of cash acquisition costs is assumed to be met 50% from gross cash reserves, with the balance from the existing revolving credit facility which was previously undrawn, bearing a c 3% interest rate. We now expect FY20 year-end net debt of £4.4m, compared to our previous estimate of a strong increase in net cash balances to £74.7m. Net assets acquired of some £45m mean around £25m of goodwill and acquired intangible assets will be added to the balance sheet.

Exhibit 1: Avon Rubber earnings revisions

Year to September (£m)

2020e

2021e

 

Prior

New

% change

Prior

New

% change

Avon Protection

131.6

179.8

36.6%

139.5

201.7

44.6%

milkrite I InterPuls

53.2

53.2

0.0%

54.8

54.8

0.0%

Total sales

184.8

233.0

26.1%

194.3

256.4

32.0%

 

 

 

 

 

 

EBITDA

42.5

47.3

11.3%

45.5

55.4

21.9%

 

 

 

 

 

 

Avon Protection

27.9

31.4

12.7%

30.2

38.5

27.7%

milkrite I InterPuls

8.1

8.1

0.0%

8.5

8.5

0.0%

Unallocated

(2.5)

(3.0)

20.2%

(2.5)

(3.1)

20.2%

Adjusted EBITA

33.6

36.6

9.1%

36.2

44.0

21.7%

 

 

 

 

 

 

Adjusted PBT

33.7

35.4

4.8%

36.4

43.6

19.6%

 

 

 

 

 

 

EPS - adjusted (p)

88.8

93.1

4.8%

95.9

114.7

19.6%

DPS (p)

27.1

27.1

0.0%

35.2

35.2

0.0%

Net debt/(cash)

(74.7)

4.4

N/M

(91.3)

(16.4)

-82.0%

Source: Edison Investment Research estimates

Exhibit 2: Financial summary

£000s

2018

2019

2020e

2021e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

165,500

179,300

232,976

256,445

Cost of Sales

(99,900)

(106,800)

(138,772)

(152,751)

Gross Profit

65,600

72,500

94,204

103,694

EBITDA

 

 

35,300

39,500

47,327

55,406

Operating Profit (before amort. and except.)

 

 

30,400

35,100

40,960

48,764

Intangible Amortisation

(3,100)

(3,800)

(4,345)

(4,758)

Operating profit (company definition)

27,300

31,300

36,615

44,006

Exceptionals

(5,600)

(17,700)

(8,000)

(6,300)

Other

(100)

(100)

(100)

(100)

Operating Profit

21,600

13,500

28,515

37,606

Net Interest

0

200

(1,151)

(313)

Profit Before Tax (norm)

 

 

27,200

31,400

35,364

43,592

Profit Before Tax (FRS 3)

 

 

21,600

13,700

27,364

37,292

Tax

(1,800)

600

(5,199)

(7,086)

Profit After Tax (norm)

23,500

28,000

28,645

35,310

Profit After Tax (FRS 3)

19,800

14,300

22,165

30,207

Average Number of Shares Outstanding (m)

30.5

30.5

30.5

30.5

EPS - normalised (p)

 

 

77.1

91.7

93.9

115.7

EPS - normalised & fully diluted (p)

 

 

76.6

90.9

93.1

114.7

EPS - (IFRS) (p)

 

 

64.9

46.9

72.6

99.0

Dividend per share (p)

16.0

20.8

27.1

35.2

Gross Margin (%)

39.6

40.4

40.4

40.4

EBITDA Margin (%)

21.3

22.0

20.3

21.6

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

18.4

19.6

17.6

19.0

BALANCE SHEET

Fixed Assets

 

 

64,100

56,700

127,671

123,080

Intangible Assets

41,500

35,300

56,780

52,933

Tangible Assets

22,600

21,400

70,891

70,147

Investments

0

0

0

0

Current Assets

 

 

102,000

117,000

113,557

96,587

Stocks

23,000

20,700

27,166

30,201

Debtors

24,200

35,400

34,067

37,498

Cash

46,600

48,400

39,825

16,387

Other

8,200

12,500

12,500

12,500

Current Liabilities

 

 

(41,400)

(36,600)

(91,284)

(51,315)

Creditors

(41,300)

(36,500)

(47,023)

(51,319)

Short term borrowings

(100)

(100)

(44,262)

4

Long Term Liabilities

 

 

(39,900)

(50,700)

(50,643)

(50,586)

Long term borrowings

0

0

0

0

Other long term liabilities

(39,900)

(50,700)

(50,643)

(50,586)

Net Assets

 

 

84,800

86,400

99,301

117,765

CASH FLOW

Operating Cash Flow

 

 

33,400

15,200

48,351

50,626

Net Interest

(200)

0

(1,151)

(313)

Tax

(1,800)

600

(5,199)

(7,086)

Capex

(8,900)

(7,900)

(16,683)

(12,309)

Acquisitions/disposals

5,100

0

(70,000)

0

Financing

(1,100)

(1,300)

(1,000)

(1,000)

Dividends

(4,100)

(5,400)

(7,055)

(9,090)

Other

(600)

600

0

0

Net Cash Flow

21,800

1,800

(52,737)

20,828

Opening net debt/(cash)

 

 

(24,700)

(46,500)

(48,300)

4,437

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(46,500)

(48,300)

4,437

(16,391)

Source: Company reports, 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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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

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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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

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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