Strong growth in resilient markets

Avon Rubber 20 May 2020 Update
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Avon Rubber

Strong growth in resilient markets

H120 results

Aerospace & defence

20 May 2020

Price

2,975p

Market cap

£907m

US$1.23/£1

Net debt* (£m) at 31 March 2020
*Excluding leases

45.8

Shares in issue

30.5m

Free float

96.8%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.4

8.8

107.2

Rel (local)

6.6

37.0

152.5

52-week high/low

2,975p

1,252p

Business description

Avon Rubber designs, develops and manufactures products in the protection (77% of H120 sales) and dairy (23%) sectors. Its major contracts are with national security organisations such as the US DOD. Over 75% of H120 sales were from the US.

Next events

FY20 pre-close update

21 September 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

Avon Rubber has produced a strong set of interim results, with strong organic growth at Avon Protection and a much improved first half performance by milkrite | InterPuls in dairy. With the newly acquired Helmets & Armor line of business adding another growth stream, the outlook for the group is for the delivery of profitable growth notwithstanding the current pandemic.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/18

165.5

27.2

76.6

16.0

38.8

0.5

09/19

179.3

31.4

90.9

20.8

32.7

0.7

09/20e

233.0

35.4

93.1

27.1

32.0

0.9

09/21e

288.4

49.2

129.5

35.2

23.0

1.2

Note: Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. After adoption of IFRS 16.

Delivering on the strategy in H120

Management continues to successfully execute the three pronged strategy of organically growing core activities, enhanced by a focus on selective new product development and augmented by value-creating M&A. Avon Protection and milkrite | InterPuls both delivered strong organic sales growth of 10.0% and 8.5% respectively, albeit against a subdued prior year comparison. At Avon Protection both the Military and ongoing First Responders lines of business delivered strong organic revenue growth, which was boosted by the acquisition of Helmets & Armor from the start of Q220. All lines of the dairy business in all geographies drove the improved performance at milkrite | InterPuls. There was a £94.1m cash outflow that left net debt at £45.8m (excluding lease liabilities of £21.1m), £90.7m of which related to the acquisition. The interim dividend was once again increased by 30% to 9.02p per share, reflecting management confidence in prospects.

Order backlogs underpin sustained growth

H120 order backlog at Avon Protection of £110.6m was almost double the position a year earlier as Military continued to deliver its existing strong backlog and Helmets & Armor added £64.8m, which should support maintenance of the quarterly sales rate it delivered in Q220 through the second half of the year. Recent contract awards should kick in from FY21, with the anticipated $5m of cost synergies progressively improving margins. Favourable dairy market conditions also supported a positive book to bill performance at milkrite | InterPuls, with an opening H220 backlog of £4.9m (H119: £3.7m).

Valuation: Maintaining premium rating

Avon has maintained its rating in the recent market turmoil, reflecting the robust financial performance augmented by the acquisition. We continue to feel that the group is well positioned strategically to weather the pandemic as defence and dairy markets appear resilient. The FY21 P/E multiple of 23.0x reflects the strong growth being delivered.

H120 results

The performance in H120 was much stronger than the challenging prior year period with strong momentum in Avon Protection carried through from H219, a much improved dairy performance supported by improved markets, and a strong initial contribution from the new Helmets & Armor line of business acquired at the beginning of Q220.

Orders received £117.9m (H119: £94.9m), up 24.2% or down 4.7% at organic constant currency, and representing a book to bill ratio of 1.25x.

Closing order book up 95.4% at £115.5m, down 15.6% at organic constant currency.

Reported H120 revenues of £94.7m (H119: £73.6m), up 28.7%, or 9.5% at organic constant currency.

Adjusted H120 operating profit of £15.6m (H119: £9.0m) up 73.3%, or 45.2% on an organic constant currency basis.

Adjusted H120 profit before tax up 67.0% at £14.7m (H119: £8.8m), up 39.8%% at organic constant currency.

Adjusted H120 EPS rose 64.2% to 38.1p (H119: 23.2p) or 37.5% at constant currency.

Interim DPS was 9.02p (H119: 6.94p), an increase of 30.0%.

Net financial debt £45.8m excluding £21.1m of lease liabilities compared to net cash of £48.3m excluding lease liabilities of £11.3m at the start of the year.

Exhibit 1: Avon Rubber H120 results summary

Half year to March (£m)

H119

H120

% change

% change at OCC*

Orders

Avon Protection

69.3

90.5

30.6%

(9.2%)

milkrite I InterPuls

25.6

27.4

7.0%

7.5%

Total orders

94.9

117.9

24.2%

(4.7%)

Revenues

Avon Protection

49.3

68.4

38.7%

10.0%

Of which

Military

30.9

37.2

20.4%

20.2%

Helmets & Armor

13.8

First responder

18.4

17.4

(5.4%)

(6.8%)

milkrite I InterPuls

24.3

26.3

8.2%

8.5%

Of which

Interface

17.4

18.7

7.5%

7.1%

Precision, Control & Intelligence

4.3

4.5

4.7%

8.7%

Farm Services

2.6

3.1

19.2%

17.8%

Total group revenues

73.6

94.7

28.7%

9.5%

Adjusted operating profit

Avon Protection

6.7

12.8

91.0%

55.1%

milkrite I InterPuls

3.4

4.1

20.6%

17.5%

Other

(1.1)

(1.3)

18.2%

(15.4%)

Total adjusted operating profit

9.0

15.6

73.3%

45.2%

Adjusted operating profit margin

Avon Protection

13.6%

18.7%

37.7%

milkrite I InterPuls

14.0%

15.6%

11.4%

Total adjusted operating profit margin

12.2%

16.5%

34.7%

EPS adjusted (p)

23.2

38.1

64.20%

37.5%

DPS (p)

6.94

9.02

30.0%

30.0%

Net cash/(debt)

48.3

(45.8)

N/M

Lease liabilities

(11.3)

(21.1)

86.7%

Net financial liabilities

37.0

(66.9)

N/M

Source: Company reports. Note: *Organic constant currency.

Avon Protection

Avon Protection’s revenues grew 38.7% to £68.4m. The divisional EBITDA contribution was 34.3% higher at £16.1m, a 400bp increase in margin to 23.5%. The Military line of business of Avon Protection is the de facto, sole source supplier to the US DOD of General Purpose Masks, Tactical Masks, Power Air Systems and Tactical SCBA (self-contained breathing apparatus). It also supplies systems to international export customers, which accounted for 53% of H120 Military sales. The newly acquired Helmets & Armor extends the product offering to body armour and helmets, primarily for the DOD. First Responders supplies systems to law enforcement, fire and other emergency services.

Military grew strongly with organic growth of 20.2% as it continued to supply the multi-year mask systems contracts. The positive momentum should continue in the second half and is supported by a £36.5m order backlog at H120. The business continues to pursue additional export opportunities and talks regarding the replenishment contract for M50 general purpose mask systems for the DOD are said to be at an advanced stage.

Helmets & Armor made an initial contribution to revenues of £13.8m in Q220, and management expects to maintain that quarterly run rate during H220 before deliveries against the recently announced contract awards commence in FY21. The order backlog at H120 was £64.8m, which provides good medium-term visibility. Clearly, FY21 growth will also reflect a full year contribution from the line of business compared to nine months in FY20. Management also says it is on track to deliver the $5m of anticipated cost synergies by the end of FY21.

Excluding the revenue decline that resulted from the withdrawal from the fire SCBA market (FY19 revenues: £6.7m), First Responder revenues grew organically at constant currency by 6.6% to £17.4m in H120. The line of business is experiencing some increase in demand for filters accessories and spares as a result of COVID-19. The H120 order backlog stood at £9.3m. However, management does not expect to make up the fire SCBA shortfall in the full year.

Milkrite | InterPuls

There was also strong growth at milkrite | InterPuls, where favourable dairy market conditions supported positive farmer sentiment. Increased global production combined with stable milk and feed prices. Revenues grew in all three lines of activity (Interface, Precision Control & Intelligence and Farm Services). Orders received of £27.4m were 7.5% higher organically than in H119, and provided a backlog of £4.9m to underpin H220 prospects, an increase of 33.1%. Adjusted EBITDA of £5.8m was 11.5% higher organically with margins of 22.0%, 60bp better organically than in H119.

Finance

Excluding lease liabilities, the company moved from net cash of £48.3m at the start of the year to a net debt position of £45.8m at H120, almost entirely as a result of the acquisition of Helmets & Armor on 2 January 2020. The company is still awaiting payment of a $16.6m Rest of the World Military mask system contract that was delivered in FY19 and this is expected in H220.

The adoption of IFRS 16 accounting has added £21.1m of lease liabilities to net group net debt at H120, including £8.5m added by the acquisition of Helmets & Armor. These predominantly relate to property leases.

At the period end, the group had £15.8m undrawn on its $85m (£69.5m) RCF and gross cash of £7.8m, providing £23.7m of liquidity headroom. The net debt to EBITDA ratio (excluding lease liabilities) was 1.0x at H120, well below the debt covenant level of 3.0x. Management expects both liquidity and leverage to improve in H220.

Outlook

While COVID-19 uncertainty continues to weigh on markets, it would appear that Avon Rubber’s combination of defence and dairy revenues should remain largely unscathed. Both are classified as essential by the US, UK and Italian governments, and disruption has been minimal with no headcount reductions required. Measures have been implemented to ensure the safety of staff and employees. Longer-term budgetary issues could influence defence spending, but the critical nature of Avon Protection’s products and need for maintaining stocks would appear to be supportive of sustained volumes.

The continuing strength of the Military line of business and the full second half contribution from Helmets & Armor should deliver strong growth in adjusted operating profit for Avon Protection, more than offsetting the impact on the First Responders line of business of the withdrawal from the Fire SCBA market.

The board is confident of achieving FY20 expectations and we have maintained our estimates for revenues, adjusted PBT, adjusted EPS and net debt before finance leases. The EBITDA and adjusted operating profit increases reflect the adoption of IFRS 16, which spreads the cost of finance leases between interest and depreciation charges.

Exhibit 2: Avon Rubber earnings estimates revisions

Year to September (£m)

2020e

2021e

 

Prior

New

% change

Prior

New

% change

Avon Protection

179.8

179.8

0.0%

233.6

233.6

0.0%

milkrite I InterPuls

53.2

53.2

0.0%

54.8

54.8

0.0%

Total Sales

233.0

233.0

0.0%

288.4

288.4

0.0%

 

 

 

 

 

 

EBITDA

47.4

50.2

5.9%

62.1

65.1

4.8%

 

 

 

 

 

 

Avon Protection

31.4

31.8

1.2%

44.1

44.6

1.1%

milkrite I InterPuls

8.1

8.4

2.6%

8.5

8.8

2.6%

Unallocated

(3.0)

(2.9)

-3.5%

(3.1)

(3.0)

-3.5%

Adjusted EBITA

36.6

37.3

1.9%

49.6

50.4

1.6%

 

 

 

 

 

 

Adjusted PBT

35.4

35.4

0.0%

49.2

49.2

0.0%

 

 

 

 

 

 

EPS - adjusted fully diluted continuing (p)

93.1

93.1

0.0%

129.5

129.5

0.0%

DPS (p)

27.1

27.1

0.0%

35.2

35.2

0.0%

Net debt/(cash) excluding finance leases

8.7

8.7

0.0%

(12.1)

(12.1)

0.0%

Source: Edison Investment Research estimates

Exhibit 3: Financial summary

£m

2018

2019

2020e

2021e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

165.5

179.3

233.0

288.4

Cost of Sales

(99.9)

(106.8)

(138.8)

(171.8)

Gross Profit

65.6

72.5

94.2

116.6

EBITDA

 

 

35.3

41.3

50.2

65.1

Operating Profit (before amort. and except.)

 

 

30.4

35.9

41.7

55.4

Intangible Amortisation

(3.1)

(3.9)

(4.4)

(4.9)

Operating profit (company definition)

27.3

32.0

37.3

50.4

Exceptionals

(5.6)

(17.7)

(8.0)

(6.3)

Other

(0.1)

(0.7)

(1.2)

(1.1)

Operating Profit

21.6

13.6

28.1

43.1

Net Interest

0.0

0.1

(0.7)

(0.2)

Profit Before Tax (norm)

 

 

27.2

31.4

35.4

49.2

Profit Before Tax (FRS 3)

 

 

21.6

13.7

27.4

42.9

Tax

(1.8)

600

(5,198)

(8,152)

Profit After Tax (norm)

23.5

28.0

28.6

39.9

Profit After Tax (FRS 3)

19.8

14.3

22.2

34.8

Average Number of Shares Outstanding (m)

30.5

30.5

30.5

30.5

EPS - normalised (p)

 

 

77.1

91.7

93.8

130.6

EPS - normalised & fully diluted (p)

 

 

76.6

90.9

93.1

129.5

EPS - (IFRS) (p)

 

 

64.9

46.9

72.6

113.9

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

23.0

21.6

22.6

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

18.4

20.0

17.9

19.2

BALANCE SHEET

Fixed Assets

 

 

64.1

64.4

148.6

144.2

Intangible Assets

41.5

35.3

59.2

56.0

Tangible Assets

22.6

21.4

72.8

73.9

Right of Use Asset

7.7

16.6

14.4

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

102.0

117.5

84.7

106.1

Stocks

23.0

20.7

27.2

34.0

Debtors

24.2

35.4

34.1

42.2

Cash

46.6

48.4

10.4

17.0

Other

8.2

13.0

13.0

13.0

Current Liabilities

 

 

(41.4)

(35.4)

(65.0)

(61.3)

Creditors

(41.3)

(35.3)

(45.8)

(56.5)

Short term borrowings

(0.1)

(0.1)

(19.2)

(4.8)

Long Term Liabilities

 

 

(39.9)

(62.0)

(70.8)

(68.6)

Long term borrowings

0.0

0.0

0.0

0.0

Lease Liabilities

(11.3)

(20.2)

(18.0)

Other long term liabilities

(39.9)

(50.7)

(50.6)

(50.6)

Net Assets

 

 

84.8

84.5

97.4

120.4

CASH FLOW

Operating Cash Flow

 

 

33.4

15.2

48.0

57.6

Net Interest

(0.2)

0.0

(0.7)

(0.2)

Tax

(1.8)

0.6

(5.2)

(8.2)

Capex

(8.9)

(7.9)

(18.7)

(15.8)

Acquisitions/disposals

5.1

0.0

(72.4)

(2.4)

Financing

(1.1)

(1.3)

(1.0)

(1.0)

Dividends

(4.1)

(5.4)

(7.1)

(9.1)

Other

(0.6)

0.6

0.0

0.0

Net Cash Flow

21.8

1.8

(57.0)

20.9

Opening net debt/(cash)

 

 

(24.7)

(46.5)

(48.3)

8.7

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(46.5)

(48.3)

8.7

(12.1)

Total net financial liabilities

 

 

(46.5)

(37.0)

28.9

5.9

Source: Company reports, Edison Investment Research estimates


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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.

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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.

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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.

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.

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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

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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