Protection is the name of the game

Avon Rubber 27 May 2021 Update
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Avon Rubber

Protection is the name of the game

H121 results

Aerospace & defence

27 May 2021

Price

2,962p

Market cap

£918m

US$1.41/£1

Adjusted net debt ($m) at 31 March 2021
(excluding lease liabilities of $31.2m)

12.9

Shares in issue

31.0m

Free float

98.8%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(16.1)

3.8

(7.1)

Rel (local)

(17.0)

(1.9)

(23.5)

52-week high/low

4,625p

2,780p

Business description

Avon Rubber designs, develops and manufactures personal protection products for Military and First Responder markets including respiratory mask systems, helmets and body armour. Its main customers are national security agencies such as the US Department of Defense and c 90% of sales are from the United States.

Next events

FY21 results

23 November 2021

Analyst

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

The benefits of the three-pronged growth strategy are reflected in Avon Rubber’s H121 performance, which delivered strong overall growth in revenues and adjusted group profitability driven by a strong initial contribution from Team Wendy. The outlook for FY21 is maintained by management, which expects to meet market consensus expectations for adjusted PBT with the anticipated second-half weighting of revenues, despite the adverse impact of FX on costs. Strong order intake and backlog underpin medium-term prospects for further growth. The FY22 P/E of 23.1x represents a c 60% premium to UK defence peers, reflecting the strong growth expectations.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

09/19

162.0

28.3

84.9

26.6

49.2

0.6

09/20

213.6

36.0

96.2

34.5

43.4

0.8

09/21e

284.9

48.1

125.6

44.9

33.3

1.1

09/22e

362.0

69.4

181.1

53.9

23.1

1.3

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

Positive H121 momentum

Revenues grew by 41.0% to $122.0m (H120: $86.5m), adjusted EBITDA by 33.1% to $24.1m (H120: $18.1m) and adjusted operating profit by 25.0% to $17.5m (H120: $14.0m). That performance includes a five-month contribution from Team Wendy, acquired on 2 November 2020, of $20.5m to revenues, $6.6m to adjusted EBITDA at a margin of 32.2% and $6.1m to adjusted operating profit. Excluding Team Wendy, revenues grew 30.5%, with adjusted EBITDA $0.6m lower at $17.5m and adjusted operating profit falling to $11.4m. Order intake was stronger with a 45.6% increase to $167.9m (H120: $114.6m), or 30.5% excluding the initial $18.4m contribution from Team Wendy. The book to bill ratio of 1.4x leaves the order backlog at $156.6m (H120: $135.2m). Following the acquisition of Team Wendy for $135.2m, H121 adjusted net debt excluding lease liabilities was $12.9m compared to net cash of $147.7m at the start of the financial year. The interim dividend was increased by 30% in line with the company’s stated policy.

The future is Avon Protection

With the increased focus on critical personal protection products primarily in defence and security markets, the company expects to formally change its name to Avon Protection in H221. Management remains confident of achieving the full year outlook, with H221 trading to date in line with expectations and supported by the strong order backlog. The order book provides visibility for FY22 and beyond with investment in technology and the product offering underpinning future growth.

Valuation: Premium reflects growth and cash flow

The share price has retreated from the highs of 2020 as the delays to the ballistic protection contracts reminded the market of potential risks to the growth trajectory. While trading at a substantial premium to UK defence peers, EPS, dividend and cash flow growth are well above average.

H121 results deliver growth

H121 is the first reported period following the transformation of the company into a focused defence and security group, with operations centred on Avon Protection and the newly acquired Team Wendy. It is also the first time the company has reported in US dollars, reflecting the geographic origin of the bulk of group revenues. Despite the pandemic and the adverse FX impact (appreciation of sterling versus US$) that inflated the UK cost base, the three-pronged strategy of core growth, selective product development and value-enhancing acquisitions has delivered strong overall progress despite the disruption to new ballistic protection contracts announced in December 2020.

Exhibit 1: H121 results highlights

$m

H120

H121

% change

Orders received

114.6

167.9

46.50%

Closing order book

135.2

156.6

15.80%

Revenue

86.5

122.0

41.0%

Adjusted EBITDA

18.1

24.1

33.1%

Adjusted operating profit

14.0

17.5

25.0%

Adjusted profit before tax

13.0

16.0

23.1%

Adjusted basic EPS (US cents)

32.1

41.1

28.0%

Interim DPS (US cents)

11.0

14.3

30.0%

Adjusted net debt (excluding leases)

65.6

12.9

-80.3%

Lease liabilities

25.9

31.2

20.5%

Source: Avon Rubber

Order intake was stronger with a 45.6% increase to $167.9m (H120: $114.6m), or 30.5% excluding the initial $18.4m contribution from Team Wendy. The book to bill ratio of 1.4x leaves the order backlog at $156.6m (H120: $135.2m).

Revenues grew by 41.0% to $122.0m (H120: $86.5m), adjusted EBITDA by 33.1% to $24.1m (H120: $18.1m, margin 19.7%) and adjusted operating profit by 25.0% to $17.5m (H120: $14.0m). That performance includes a five-month contribution from Team Wendy, acquired on 2 November 2020, of $20.5m to revenues, $6.6m to adjusted EBITDA at a margin of 32.2% and $6.1m to adjusted operating profit. Excluding Team Wendy, ongoing Avon Protection revenues grew 17.6% with adjusted EBITDA $0.6m lower at $17.5m and adjusted operating profit falling to $11.4m. The profit declines largely reflected the previously announced delays to new body armour and helmet contracts, as well as continued investment to resolve product-specific issues. Primarily, that involved increasing the energy absorption of backing materials and upgrading the ceramic plates. Management appears confident that these have been addressed and new approval processes are underway.

Exhibit 2: Avon Rubber half year revenue analysis

$m

H120

H121

% change

Respiratory

Ballistic

Total

Respiratory

Ballistic

Total

Respiratory

Ballistic

Total

Military

46.8

16.7

63.5

60.6

13.7

74.3

29.5%

(18.0)%

17.0%

First Responder

22.2

0.8

23.0

24.7

2.7

27.4

11.3%

237.5%

19.1%

Avon Protection

69.0

17.5

86.5

85.3

16.4

101.7

23.6%

(6.3)%

17.6%

Team Wendy

20.5

20.5

Eliminations

(0.2)

(0.2)

Group total

69.0

17.5

86.5

85.3

36.7

122.0

23.6%

109.7%

41.0%

Source: Avon Rubber

Respiratory product revenues grew 23.6% to $85.3m, comprised of 29.5% growth in Military to $60.6m and 11.3% growth for First Responders to $11.7m. The performance of the ongoing activities was held back by delays in Ballistic products which adversely affected H121 Military revenues and profits but should unwind as contracts progress and volumes climb in H221. Ballistic product sales for Military customers fell 18.0% to $13.7m despite an extra quarter of consolidation. However, Ballistic products sales to First Responders performed well with revenues of $2.7m (H120: $0.8m).

Order intake was stronger with a 45.6% increase to $167.9m (H120: $114.6m), or 30.5% excluding the initial $18.4m contribution from Team Wendy. The book to bill ratio of 1.4x leaves the order backlog at $156.6m (H120: $135.2m).

Adjusted PBT tax rose 23.1% to $16.0m and adjusted EPS of 41.1 US cents were up 28.0%.

Following the acquisition of Team Wendy for $135.2m, H121 adjusted net debt excluding lease liabilities was $12.9m compared to net cash of $147.7m at the start of the financial year. H121 cash outflows also included an inventory build of c $10m to provide strategic buffer stocks against potential supply chain disruptions as well as preparing for H221 sales increases. In addition, $7.6m of cash costs against the divestment of the dairy business were incurred.

The interim dividend of US14.3 cents per share represents a 30.0% increase on the H120 payment of US 11.0 cents, in line with the company’s declared policy. Assuming the same increase for the full year, the FY21 dividend yield should be around 1.0% (at today’s exchange rate).

FY21 outlook

Around half of the order backlog at H121 of $157m is for delivery in H221, which means around $80m of additional revenues need to be booked and delivered to meet our FY21 revenue estimate. Around half of the required revenues should come from run and repeat orders for First Responder products and Team Wendy helmet systems, with the c $40m balance to come from Military. Management indicates that the level of required in year Military book and deliver orders is typical for the stage of the year and points to numerous opportunities for new and follow-on orders spread around the globe. These include additional orders for the DOD for M50 and M53A1 mask systems, a number of new countries that are expected to join the NATO contract as well as further orders from existing customers.

Exhibit 3: Avon Rubber revisions to earnings estimates

Year to September ($m)

2021e

2022e

 

Prior

New

% change

Prior

New

% change

Avon Protection

242.9

242.9

0.0%

314.8

314.8

0.0%

Team Wendy

42.1

42.1

0.0%

47.3

47.3

 

Total Sales

284.9

284.9

0.0%

362.0

362.0

0.0%

 

 

 

 

 

 

EBITDA

66.3

62.6

-5.6%

88.2

88.2

0.0%

 

 

 

 

 

 

Avon Protection

40.4

40.4

0.0%

61.8

61.8

0.0%

Team Wendy

10.5

10.5

 

11.8

11.8

 

Adjusted operating profit

51.0

51.0

0.0%

73.6

73.6

0.0%

 

 

 

 

 

 

Adjusted PBT

48.1

48.1

0.0%

69.4

69.4

0.0%

 

 

 

 

 

 

EPS - adjusted fully diluted continuing (p)

125.6

125.6

0.0%

181.1

181.1

0.0%

DPS (p)

44.9

44.9

0.0%

53.9

53.9

0.0%

Net debt/(cash)

(11.5)

2.5

n.m.

(38.6)

(9.7)

-74.9%

Source: Edison Investment Research

The underlying EBITDA performance has been affected by the inflationary impact of a stronger sterling on the UK cost base as well as the uneven weighting of overhead recovery between the first and second halves due to the anticipated higher H221 revenue. For the whole of FY21, management expects the EBITDA margin to be up to 100bp lower than the 22.9% achieved in FY20. However, due to delays to revenue ramp-up of the delayed ballistic contracts, amortisation is lower than previously expected so adjusted operating profit remains unchanged. D&A in FY22 remains as previously forecast as the affected contracts should ramp up to anticipated levels.

We do forecast a slightly lower level of year-end adjusted net cash, although management still expects cash conversion to recover from the 58.5% seen in H121 to 90% for the full year, aided by some unwind of the inventory build as deliveries are fulfilled.

With low net debt and the $200m revolving credit facility in place, Avon is well positioned for further investment to support and accelerate future growth including acquisitions.

On the management front, CFO Nick Keveth has informed the board of his wish to retire for personal reasons before March 2022. He will participate in the transition to his successor, with the search for a new external candidate initiated.

Exhibit 4: Financial summary

$m

2019

2020

2021e

2022e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

162.0

213.6

284.9

362.0

Cost of Sales

(100.3)

(127.8)

(174.4)

(221.6)

Gross Profit

61.7

85.8

110.5

140.4

EBITDA

 

 

36.2

52.3

63.2

88.2

Operating Profit (before amort. and except.)

 

 

33.0

42.5

55.3

79.2

Intangible Amortisation

(4.2)

(4.0)

(4.3)

(5.5)

Operating profit (company definition)

28.8

38.5

51.0

73.6

Exceptionals

(17.2)

(35.3)

(16.6)

(8.9)

Other

(0.6)

(0.1)

(1.3)

(1.3)

Operating Profit

11.0

3.1

33.0

63.4

Net Interest

0.1

(2.4)

(1.5)

(2.9)

Profit Before Tax (norm)

 

 

28.3

36.0

48.1

69.4

Profit Before Tax (FRS 3)

 

 

11.1

0.6

31.6

60.5

Tax

1.9

1.4

(6.0)

(11.5)

Profit After Tax (norm)

26.1

29.9

39.0

56.2

Profit After Tax (FRS 3)

13.0

2.0

20.1

38.4

Average Number of Shares Outstanding (m)

30.5

30.6

30.6

30.6

EPS - normalised (US cents)

 

 

85.6

97.6

127.3

183.6

EPS - normalised & fully diluted (US cents)

 

 

84.9

96.2

125.6

181.1

EPS - (IFRS) (US cents)

 

 

42.7

6.7

83.5

160.0

Dividend per share (US cents)

26.6

34.5

44.9

53.9

Gross Margin (%)

38.1

40.2

38.8

38.8

EBITDA Margin (%)

22.4

24.5

22.2

24.4

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

20.4

19.9

19.4

21.9

BALANCE SHEET

Fixed Assets

 

 

81.2

155.3

291.8

309.7

Intangible Assets

43.5

89.4

186.4

195.2

Tangible Assets

26.4

38.9

69.4

76.0

Right of Use Asset

11.3

27.1

36.0

38.5

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

147.1

299.3

167.3

177.9

Stocks

25.5

36.3

51.3

56.5

Debtors

43.6

46.0

62.7

74.5

Cash

59.6

187.3

23.7

17.3

Other

18.4

29.7

29.7

29.7

Current Liabilities

 

 

(43.6)

(98.2)

(97.4)

(97.5)

Creditors

(43.5)

(58.7)

(71.2)

(89.9)

Short term borrowings

(0.1)

(39.5)

(26.2)

(7.6)

Long Term Liabilities

 

 

(92.0)

(126.9)

(130.5)

(127.6)

Long term borrowings

0.0

0.0

0.0

0.0

Lease Liabilities

(15.9)

(29.0)

(32.9)

(30.3)

Other long term liabilities

(76.1)

(97.8)

(97.6)

(97.3)

Net Assets

 

 

92.6

229.5

231.3

262.5

CASH FLOW

Operating Cash Flow

 

 

8.8

(3.4)

33.8

83.9

Net Interest

0.0

(2.4)

(1.5)

(2.9)

Tax

1.9

1.4

(6.0)

(11.5)

Capex

(7.3)

(19.9)

(29.5)

(32.3)

Acquisitions/disposals

0.0

118.8

(134.4)

(9.2)

Financing

(1.7)

0.0

(1.3)

(1.3)

Dividends

(6.9)

(8.9)

(11.6)

(14.7)

Other

7.4

0.8

0.0

0.0

Net Cash Flow

2.3

86.3

(150.4)

12.2

Opening net debt/(cash)

 

 

(57.3)

(61.5)

(147.7)

2.5

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

1.9

0.0

0.2

0.0

Closing net debt/(cash)

 

 

(61.5)

(147.7)

2.5

(9.7)

Total net financial liabilities /(assets)

 

 

(45.6)

(118.7)

35.4

20.6

Source: Company reports, Edison Investment Research


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.

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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 2021 Edison Investment Research Limited (Edison).

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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.

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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.

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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

1185 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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