Sentiment needs restoring to access value

Avon Protection 19 November 2021 Update
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Avon Protection

Sentiment needs restoring to access value

Further body armour
contract delays

Aerospace & defence

19 November 2021

Price

1,137p

Market cap

£353m

US$1.35/£1

Adjusted net debt ($m) at 30 Sept 2021
(excluding lease liabilities)

27

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

(43.9)

(42.4)

(73.7)

Rel (local)

(44.5)

(42.9)

(77.2)

52-week high/low

4,625p

928p

Business description

Avon Protection 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

December 2021

Analyst

Andy Chambers

+44 (0)20 3681 2525

Avon Protection is a research client of Edison Investment Research Limited

The reaction to the latest product approval delays and the strategic review in the body armour business appears to more than discount the likely financial impact and does not reflect solid progress in the core of the group involved in respirators and helmets. While the full ramifications of the delays and the strategic review are yet to be quantified by management, we assume a $40m reduction in FY22e revenue, affecting our FY22e EPS by 19%. We anticipate a strong recovery in FY23 EPS due to loss elimination and growth in the core respiratory and helmets activities.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

09/19

162.0

28.3

84.9

26.6

18.1

1.7

09/20

213.6

36.0

96.2

34.5

16.0

2.2

09/21e

248.0

25.6

66.7

44.9

23.0

2.9

09/22e

288.6

38.1

99.4

53.9

15.4

3.5

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

Further body armour contract deferrals

The new delays to body armour contracts in the US are unwelcome following the previous problems that appeared to be close to resolution. The failure in First Article Testing of the next-generation body armour product for the US Army, known as Vital Torso Protection Enhanced Small Arms Protection Inserts (VTP ESAPI), is similar to the previous issue for the legacy body armour product, which had taken almost a year to resolve. In addition, the delay in final approval for the legacy body armour for the Defense Logistics Agency (DLA) to Q222 defers initial revenue. While underlying trading for FY21 is expected to be in line with October’s management guidance, any asset write-downs arising from the delays have yet to outlined. The FY21 results announcement is deferred from 23 November to early December.

Cash impact should be manageable

In our opinion, the strategic review of the armour business should result in lower future investment levels. Disposal or a structured exit are also possible options, although the cash cost should be limited by mitigating factors such as residual asset values. We note the DLA body armour contract was incremental to the original business case for the Q220 Ceradyne asset purchase, which was centred on military helmets. Contingent consideration of up to $25m was payable had the armour contracts been awarded and executed as planned, of which $6m was incurred to date following initial contract awards. The cash impact in our model is also partly offset by the removal in FY22 of $10m of contingent consideration we had assumed. We cut our FY22 revenue estimate by c $40m (12%), reducing FY22 EBITDA by c $12m before restructuring costs or asset write downs.

Valuation: Core progress heavily discounted

The market value hit of c $315m since the announcement outweighs the likely financial impact of a full withdrawal. The FY22e P/E of 15.4x may be challenged by further cash costs but we expect a strong recovery in FY23. We suspect the progressive growth in the dividend which has been maintained as EPS recovery was in sight may be temporarily interrupted as the armour issues are sorted out.

Revisions to earnings estimates

With management having provided no guidance for FY22, we have adjusted our estimates to reflect our assumption of a reduction of $40m in revenue compared to our prior estimates. We estimate the impact on adjusted FY22 PBT to be around $9m. It should be noted that the contract delays and subsequent strategic review of the business may well lead to further costs of both a non-cash (including asset write downs) and cash (eg restructuring and penalties) nature being incurred. We feel a disposal is likely to prove difficult, although the production capacity could be of interest. The cash costs of withdrawal or closure should be limited due to low US compensation rates and the potential to sell production assets.

While FY21 income statement numbers are unchanged, we have adjusted cash flow estimates modestly to reflect FY21 year-end adjusted net debt cited in the October trading update.

Exhibit 1: Avon Protection revisions to earnings estimates

Year to September ($m)

2021e

2022e

 

Prior

New

% change

Prior

New

% change

Avon Protection

206.0

206.0

0.0%

281.6

241.3

-14.3%

Team Wendy

42.1

42.1

0.0%

47.3

47.3

0.0%

Total sales

248.0

248.0

0.0%

328.9

288.6

-12.3%

 

 

EBITDA

43.5

43.5

0.0%

71.5

59.4

-16.9%

 

 

Avon Protection

18.5

18.5

0.0%

41.3

30.2

-26.9%

Team Wendy

10.5

10.5

11.8

11.8

 

Adjusted operating profit

29.1

29.1

0.0%

53.1

42.0

-20.9%

 

 

Adjusted PBT

25.6

25.6

0.0%

46.8

38.1

-18.6%

 

 

EPS - adjusted fully diluted continuing (p)

66.7

66.7

0.0%

122.2

99.4

-18.6%

DPS (c)

44.9

44.9

0.0%

53.9

53.9

0.0%

Net debt/(cash)

28.7

27.0

-5.7%

14.2

20.1

41.3%

Source: Edison Investment Research estimates

Exhibit 2: Financial summary

$m

2019

2020

2021e

2022e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

162.0

213.6

248.0

288.6

Cost of Sales

(100.3)

(127.8)

(151.8)

(176.7)

Gross Profit

61.7

85.8

96.2

111.9

EBITDA

 

 

36.2

52.3

43.5

59.4

Operating Profit (before amort. and except.)

 

 

33.0

42.5

34.8

49.9

Intangible Amortisation

(4.2)

(4.0)

(5.8)

(7.9)

Operating profit (company definition)

28.8

38.5

29.1

42.0

Exceptionals

(17.2)

(35.3)

(17.8)

(9.6)

Other

(0.6)

(0.1)

(1.4)

(1.4)

Operating Profit

11.0

3.1

9.8

31.0

Net Interest

0.1

(2.4)

(2.0)

(2.4)

Profit Before Tax (norm)

 

 

28.3

36.0

25.6

38.1

Profit Before Tax (FRS 3)

 

 

11.1

0.6

7.8

28.5

Tax

1.9

1.4

(1.5)

(5.4)

Profit After Tax (norm)

26.1

29.9

20.7

30.9

Profit After Tax (FRS 3)

13.0

2.0

4.6

16.9

Average Number of Shares Outstanding (m)

30.5

30.6

30.6

30.6

EPS - normalised (US cents)

 

 

85.6

97.6

67.6

100.8

EPS - normalised & fully diluted (US cents)

 

 

84.9

96.2

66.7

99.4

EPS - (IFRS) (US cents)

 

 

42.7

6.7

20.5

75.4

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

17.5

20.6

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

20.4

19.9

14.0

17.3

BALANCE SHEET

Fixed Assets

 

 

81.2

155.3

312.4

316.4

Intangible Assets

43.5

89.4

200.6

198.2

Tangible Assets

26.4

38.9

72.8

76.6

Right of Use Asset

11.3

27.1

38.9

41.7

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

147.1

299.3

158.5

154.6

Stocks

25.5

36.3

52.1

49.4

Debtors

43.6

46.0

62.5

64.0

Cash

59.6

187.3

11.8

9.1

Other

18.4

29.7

32.2

32.2

Current Liabilities

 

 

(43.6)

(98.2)

(99.6)

(98.4)

Creditors

(43.5)

(58.7)

(60.7)

(69.2)

Short term borrowings

(0.1)

(39.5)

(38.9)

(29.1)

Long Term Liabilities

 

 

(92.0)

(126.9)

(141.2)

(137.2)

Long term borrowings

0.0

0.0

0.0

0.0

Lease Liabilities

(15.9)

(29.0)

(35.6)

(32.8)

Other long term liabilities

(76.1)

(97.8)

(105.6)

(104.3)

Net Assets

 

 

92.6

229.5

230.1

235.5

CASH FLOW

Operating Cash Flow

 

 

8.8

(3.4)

5.0

61.9

Net Interest

0.0

(2.4)

(2.0)

(2.4)

Tax

1.9

1.4

(1.5)

(5.4)

Capex

(7.3)

(19.9)

(29.6)

(31.0)

Acquisitions/disposals

0.0

118.8

(144.4)

0.0

Financing

(1.7)

0.0

(1.4)

(1.4)

Dividends

(6.9)

(8.9)

(11.9)

(14.8)

Other

7.4

0.8

0.0

0.0

Net Cash Flow

2.3

86.3

(185.8)

6.896

Opening net debt/(cash)

 

 

(57.3)

(61.5)

(147.7)

27.0

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

1.9

0.0

11.1

0.0

Closing net debt/(cash)

 

 

(61.5)

(147.7)

27.0

20.1

Total net financial liabilities/(assets)

 

 

(45.6)

(118.7)

62.6

53.0

Source: Company reports, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Avon Protection and prepared and issued by Edison, in consideration of a fee payable by Avon Protection. Edison Investment Research standard fees are £60,000 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).

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

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

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

General disclaimer and copyright

This report has been commissioned by Avon Protection and prepared and issued by Edison, in consideration of a fee payable by Avon Protection. Edison Investment Research standard fees are £60,000 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).

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

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

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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