Avon Rubber |
More Protection enhances EPS |
Completion of acquisition |
Aerospace & defence |
3 January 2020 |
Share price performance
Business description
Next events
Analyst
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* |
EPS* |
DPS |
P/E |
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
|
|