Main menu
Edison Group
  • Home
  • Sparks
  • Equities

    Equities

    View All Equities

    Equities by Sector

    YXT.com

    MCap

    USD127m

    Last close

    USD23.43

    ▲ 20.23 (632.19%)

    Northern Data Group

    MCap

    EUR486m

    Last close

    EUR7.56

    ▲ 2.33 (44.59%)

    Bodycote

    MCap

    GBP1,572m

    Last close

    GBP9.23

    ▲ 173.00 (23.07%)

  • Sectors

    Sectors

  • Megatrends

    Megatrends

  • Thematics

    Thematics

    View All Thematics

    Latest

  • Audiovisual

    Audiovisual

    View All Audiovisual

    Latest

Avon Rubber — Update 6 May 2016

Avon Technologies (LSE: AVON)

Last close As at 05/08/2026

GBP18.88

▲ 108.00 (6.07%)

Market capitalisation

GBP572m

More on this equity

Avon Rubber — Update 6 May 2016

Avon Rubber

Avon Rubber

Robust and well positioned

Interim results

Aerospace & defence

6 May 2016

Price

820p

Market cap

£254m

Net debt (£m) at 31 March 2016

8.4

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.5

1.2

6.5

Rel (local)

4.1

(3.2)

18.7

52-week high/low

1,167p

718p

Business description

Avon Rubber designs, develops and manufactures products in the respiratory protection, defence (74% of 2015 sales) and dairy (26%) sectors. Its major contracts are with national security and safety organisations such as the DoD. 82% of sales are from the US and 18% from Europe.

Next event

Year end results

November 2016

Analyst

Roger Johnston

+44 (0)20 3077 5722

Avon Rubber is a research client of Edison Investment Research Limited

Avon Rubber’s interim results show the group is able to deliver a robust performance even in a more challenging market environment. Despite the absence of an impact order in Protection & Defence and Dairy markets being cyclically weak, the group has managed to progress on all fronts, gaining market share, and is well positioned to accelerate growth once again as markets normalise.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

124.8

16.6

43.7

5.6

18.8

0.7

09/15

134.3

19.8

56.1

7.3

14.6

0.9

09/16e

150.6

20.5

67.2

9.5

12.2

1.2

09/17e

157.4

21.7

56.5

12.0

14.5

1.5

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

Results demonstrate resilience

Avon’s H116 interims show the strategy has created a robust group that can deliver, even in weak market environments. With revenues up 5% to £66.3m, adjusted operating profit up 6% to £9.0m and adjusted PBT up 5% to £8.8m, both divisions made progress despite the challenge of low milk prices and the lack of an impact order. With an effective tax rate of just 1% (2015: 20%) reflecting anticipated geographic split of taxable profits for FY16, the finalisation of 2015 tax returns and a positive tax outcome of certain enquiries, basic EPS was up 29% to 28.7p (2015: 22.3p). Operating cash conversion was high at 163% of operating profit enabling net debt to decrease to £8.4m (£13.2m at end FY15), after £3.5m spent acquiring Argus in October 2015. The interim dividend (3.2p) continues its trend of increasing by 30% as anticipated.

Group now better positioned than in the past

Despite a more challenging market environment, the group is better positioned to benefit from a normalisation of conditions through its sustained investment and development programme. This has translated into both increased operational flexibility to deliver either DoD or impact export orders in P&D, while improved market share across Dairy positions the group to benefit from a cyclical upswing with an even stronger mix than those seen in 2009 and 2013.

Valuation: Accelerated growth opportunities remain

With results indicating that full-year expectations remain intact, we maintain our current PBT forecasts while our FY16 EPS forecast reflects the lower than expected tax rate, which is anticipated to revert to the norm in FY17. While there may be variations depending on the timing of impact orders, we believe that the accelerated growth opportunities remain into 2017 as a result of improved Dairy market share, the addition and synergies created by InterPuls and with a strong pipeline of both DoD and non-DoD orders in P&D. Our SOTP-derived fair value moves to 1,200p per share (from 1,065p) as a result of improved peer ratings.

Results demonstrate robust performance

The interim results once again show Avon’s business is structured with operational flexibility and has the ability to deliver even when markets soften and without impact orders:

■

Revenue increased by 5% to £66.3m (2015: £62.8m) while adjusted operating profit increased by 6% to £9.0m (2015: £8.5m) at an operating profit margin of 13.6% (2015: 13.5%). EBITDA increased by 9% to £13.2m (2015: £12.2m).

■

Adjusted PBT increased by 5% to £8.8m (2015: £8.4m) and with the tax charge decreased to just £0.1m (2015: £1.7m) at an effective rate of 1% (2015: 20%) due to the anticipated geographic split of profits, finalisation of 2015 tax returns and the positive outcome of certain tax enquiries and the enactment of favourable US legislation post the FY15 period end. As a result, adjusted PAT was £8.7m (2015: £6.7m) with basic adjusted EPS up 29% 28.7p (2015: 22.3p) and fully diluted EPS also up 29% at 28.1p (2015: 21.7p).

■

Operating cash conversion remained strong during the period at 163% of operating profit, allowing the group to continue to invest for future growth with capex of £3.8m. As a result of the strong cash conversion, net debt decreased by £4.8m since the FY15 year end to £8.4m even after the £3.5m cash paid to acquire the Argus thermal detection business in October 2015.

■

With the robust performance and sustained growth opportunities, the board increased the interim dividend by 30% to 3.16p (2015: 2.43p) continuing the trend witnessed over the past three years.

Divisionally, the group continued to demonstrate its leadership position in each of its chosen fields:

Protection & Defence: Operational flexibility key

Protection & Defence continued to benefit from recent investments in product development, underpinned by the M50 DoD mask programme while providing operational flexibility to meet export orders. While there were no such impact orders during the period, the division managed to marginally increase revenue to £45.7m (2015: £45.3m) while operating profit increased to £6.6m (2015: £6.4m) arising from a positive mix of product shipped, an improvement in DoD pricing and continued operational efficiency improvement. The differing areas all contributed to the result while overall order intake in H1 totalled £55m (2015: £47m) with £22m of the £30m closing order book due for delivery in H2 providing good visibility at this stage:

■

M50 mask sales to the DoD were 107,000 systems (2015: 112,000) while a further order was received towards the end of the period for 167,000 systems, which underpins order coverage until well into 2017 and allowing the group visibility and delivery flexibility.

■

M61 filter pairs returned to the mix with 36,000 sets delivered during the period (2015: zero) and an order was secured for a further 85,000 pairs expected to be delivered during H2. While this has been a more volatile area, the consumable nature of these means that as M50 masks are used in increasing numbers then demand for filters is set to grow although the current budget environment means that orders are more piecemeal at this stage.

■

Overall sales to foreign military, law enforcement and first responder customers increased year on year, although no single large impact order was received or delivered during the period. Management has indicated that international enquiries continue to be encouraging, but as ever specific timing for receipt and delivery of large orders is historically difficult to predict although the group tends to average one or two per annum and we note that management has stated that the timeline for such an order is shortening.

■

The fire market saw growth following the acquisition of Argus in October. The new thermal imaging range was added to the stable with further developments such as the new Mi-TIC Storm gaining certification.

■

DoD spares sales increased while AEF had a softer first half, having performed very well over each of the last three years, reflecting the variability in timing of certain DoD procurement programmes for fuel and water storage tanks.

The outlook for the divisions remains strong in our view with the group having shown many times over the past five years that the core DoD programme provides stability while the operational flexibility inherent in the manufacturing setup allows rapid delivery of impact orders as they arise. With the MM53 Joint Service Aircrew Mask (JSAM) funded development and test programme also progressing towards conclusion at the end of FY16 and likely to lead to a production contract from 2017 worth in excess of $70m with funding of $12m allocated in the 2017 US budget, further growth opportunities also exist beyond existing products.

Dairy: Positioned for the cyclical upswing

While the dairy market has remained challenging, as previously flagged by management, the group increased revenue by 18% to £20.6m (2015: £17.5m) as a result of the acquisition of InterPuls which offset the cyclical weakness caused by soft milk prices leading to extended use of consumables. EBITDA increased by 17% to £4.5m (2015: £3.9m) and operating profit increased to £3.4m (2015: £3.3m). Operationally, there were a number of further developments which position the group well when a cyclical upswing occurs in the dairy market as witnessed previously after the down cycles in 2009 and 2013:

■

Milkrite market share continued to increase. In both the US and European markets, Avon’s own brand Milkrite product market share increased to 50% in the US, of which 28% was the higher margin Impulse Air mouthpiece (31 March 2015: 22%, 30 September 2015: 25%), and to 23% in Europe of which Impulse Air accounted for 4.0% (31 March 2015: 3.0%, 30 September 2015: 3.5%). This continues to reduce reliance on OEM sales and highlights the benefits of the Milkrite strategy even in these softer markets.

■

Cluster Exchange progress. Take up of the Cluster Exchange Service was encouraging both in North America and Europe with 446,000 cows serviced across 1,411 farms, up from 342,000 cows at 1,100 farms at H115. The service provides a more robust, repeatable and predictable revenue stream which again insulates the business against more volatile ordering patterns and positions it well to further increase revenue potential as more farms professionalise and sign up.

■

InterPuls integration. The integration of InterPuls has progressed well. While the current market environment has a greater effect on the more capital-intensive spend of its customer base, the acquisition has provided both improved relationships with European distributors for Milkrite and also provides substantial North American upside opportunities for InterPuls products that have not been present in the market as yet. Preparations are underway with dealers being trained, samples being distributed and products launched to the market.

In addition to these drivers, the group continues to pursue opportunities in emerging markets and the sales and distribution operations opened in China and Brazil are progressing to plan. Overall, we view the division as even better placed to benefit from the cyclical upswing once markets improve than it was following the 2009 and 2013 lulls seen previously. As a result, Avon continues to invest in sales capacity to capture further market share as it has done in the past.

Operating forecasts remain unchanged

Following the interim results and the continued progress across the group even in more difficult markets, we are maintaining our operating forecasts for FY16 and FY17 respectively. Our FY16 EPS forecast has increased to 67.2p/share (previously 54.7p/share) due to the lower than forecast tax rate. We anticipate this to return to a more normalised level in FY17.

Valuation uplift potential intact

We continue to view Avon as having a core underlying valuation supported by the existing business which has demonstrated its capacity to deliver even in a more challenging market environment and in the absence of impact orders. We therefore continue to value the group based on the methodology as laid out in our November 2015 Outlook note. This yields a core fair value of 1,200p/share as shown in Exhibit 1 below, up from 1,065p/share due to increased peer ratings and a lower net debt position:

Exhibit 1: Edison sum-of-the-parts fair value

 

CY16e EBITA (£m)

Tax rate

CY16e NOPAT (core) (£m)

P/E

Value (£m)

Notes

Protection & Defence

15.1

22%

11.8

20.4

241.0

10% premium to MSA (17.5x), Tyco (17.8x) and 3M (20.4x)

Dairy

8.2

22%

6.4

21.0

135.0

50% premium to Skellerup/in-line with Genus

Net debt

(4.0)

Sep 16 year end estimate

Equity value

372

Shares in issue

31.0

Implied fair value per share (p)

 

 

1,200

 

Source: Edison Investment Research. Note: P/Es taken as at 3 May 2016.

Adding the incremental opportunities which we believe continue to exist as before, our potential upside scenario generates a fair value of 1,470p/share as shown in Exhibit 2 below:

Exhibit 2: Edison sum-of-the-parts fair value including upside opportunities

 

CY16e NOPAT (core) (£m)

CY16e NOPAT (increment)

CY16e NOPAT

P/E

Value (£m)

Notes

Protection & Defence

11.8

2.3

14.1

20.4

286.6

10% premium to MSA (17.5x), Tyco (17.8x) and 3M (20.4x)

Dairy

6.4

1.6

8.0

21.0

168.9

50% premium to Skellerup/in-line with Genus

Net debt

0.0

Sep 16 year end estimate + £5.0m incremental operating profit converted at 80%

Equity value

456

Shares in issue

31.0

Implied fair value per share (p)

 

 

1,470

 

Source: Edison Investment Research. Note: P/Es taken as at 3 May 2016.

Given the positive positioning and success in delivering even in the currently more challenged market, we believe that Avon deserves a premium over its peers. Clear identifiable catalysts to drive a re-rating include the receipt of an impact order, an improvement in Dairy market conditions and the transition from development to a production contract for the M53 JSAM aircrew mask.


Exhibit 4: Financial summary

Year end 30 September

£'000s

2013

2014

2015

2016e

2017e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

124,851

124,779

134,318

150,556

157,433

Cost of Sales

(91,140)

(83,264)

(89,629)

(100,464)

(105,054)

Gross Profit

33,711

41,515

44,689

50,091

52,379

EBITDA (before amort. and except.)

 

 

20,443

23,303

25,225

28,065

31,033

Operating Profit (before amort. and except.)

 

 

14,223

17,003

20,215

20,956

22,041

Amortisation of Intangibles

(417)

(261)

(1,043)

(2,500)

(2,500)

Exceptionals

(383)

(2,017)

(604)

0

0

Other

(420)

(400)

318

(400)

(400)

Operating Profit

 

 

13,003

14,325

18,886

18,056

19,141

Net Interest

(347)

(274)

(147)

(300)

(150)

Other finance costs

(253)

(187)

(247)

(180)

(200)

Profit Before Tax (norm)

 

 

13,656

16,554

19,821

20,476

21,691

Profit Before Tax (FRS 3)

12,403

13,864

17,838

17,576

18,791

Tax

(3,566)

(3,053)

(2,672)

(176)

(4,228)

Tax adjustment

(122)

(450)

(253)

0

0

Profit After Tax (norm)

 

 

9,968

13,051

16,896

20,300

17,063

Profit After Tax (FRS 3)

8,837

10,811

15,166

17,400

14,563

Average Number of Shares Outstanding (m)

29.5

29.9

30.1

30.2

30.2

EPS - continuing, normalised (p)

 

 

33.8

43.7

56.1

67.2

56.5

EPS - continuing, FRS 3 (p)

 

 

30.0

36.2

50.4

57.6

48.2

DPS (p)

4.3

5.6

7.3

9.5

12.0

Gross Margin (%)

27%

33%

33%

33%

33%

EBITDA Margin (%)

16%

19%

19%

19%

20%

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

11%

14%

15%

14%

14%

BALANCE SHEET

Fixed Assets

 

 

36,928

36,815

74,095

79,177

73,791

Intangible Assets

16,541

17,240

41,309

45,476

43,250

Tangible Assets

20,387

19,575

28,212

29,094

25,933

Other

0

0

4,574

4,607

4,607

Current Assets

 

 

34,449

34,971

34,481

36,747

40,735

Stocks

13,374

12,887

17,123

20,813

18,899

Debtors

20,891

19,159

17,026

15,111

19,522

Cash

184

2,925

332

823

2,314

Assets held for sale

0

0

0

0

0

Current Liabilities

 

 

(23,369)

(26,453)

(27,178)

(28,578)

(30,521)

Creditors

(17,296)

(19,601)

(18,005)

(19,408)

(21,789)

Short term borrowings

0

0

(2,350)

(438)

0

Tax

(6,073)

(6,852)

(6,823)

(8,732)

(8,732)

Liabilities for assets held for sale

0

0

0

0

0

Long Term Liabilities

 

 

(27,312)

(20,317)

(39,194)

(39,160)

(33,709)

Long term borrowings

(11,059)

0

(11,143)

(8,801)

(3,350)

Deferred Tax

(2,977)

(2,315)

(9,734)

(9,996)

(9,996)

Retirement benefit obligations

(11,279)

(16,029)

(16,605)

(18,732)

(18,732)

Provisions

(1,997)

(1,973)

(1,712)

(1,631)

(1,631)

Other

0

0

0

0

0

Net Assets

 

 

20,696

25,016

42,204

48,186

50,296

CASH FLOW

Operating Cash Flow

14,708

25,004

20,446

26,893

28,017

Net Interest

(364)

(314)

(147)

(300)

(150)

Tax

(2,229)

(2,903)

(3,270)

(176)

(4,228)

Capex

(11,054)

(6,815)

(6,183)

(8,732)

(9,131)

Acquisitions/disposals

(437)

(31)

(21,228)

(3,500)

0

Equity financing

(1,765)

0

(1,152)

(1,500)

(2,000)

Dividends

(1,132)

(1,422)

(1,859)

(2,198)

(2,870)

Net Cash Flow

(2,273)

13,519

(13,393)

10,487

9,638

Opening net (debt)/cash

 

 

(8,725)

(15,937)

2,925

(13,161)

(3,974)

Cash FX effect

123

281

97

0

0

Discontinued operations / relocation

0

0

0

(1,300)

0

Debt FX and Other

(5,062)

5,062

(2,790)

0

0

Closing net (debt)/cash

 

 

(15,937)

2,925

(13,161)

(3,974)

5,664

Source: Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avon Rubber and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

More on Avon Technologies

View All

Industrials

Avon Technologies — Transformation delivered, next phase in focus

Industrials

Avon Technologies — Record order book driving confident outlook

Industrials

Avon Protection — Unmasking its growth potential

Industrials

Avon Protection — Refocused Protection set to resume growth

Gaming Realms — Update 6 May 2016

Gaming Realms

Continue Reading
Cookie Policy Overview
Edison Group

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping us understand which section of the website you find more interesting and useful. See our Cookie Policy for more information.

Strictly necessary and functional

These cookies are used to deliver our website and content. Strictly necessary cookies relate to our hosting environment, and functional cookies are used to facilitate social logins, social sharing and rich-media content embeds.

Advertising

Advertising Cookies collect information about your browsing habits such as the pages you visit and links you follow. These audience insights are used to make our website more relevant.

Performance

Performance Cookies collect anonymous information designed to help us improve the site and respond to the needs of our audiences. We use this information to make our site faster, more relevant and improve the navigation for all users.