Last close As at 05/08/2026
GBP18.88
▲ 108.00 (6.07%)
Market capitalisation
GBP572m
The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Written by
Avon Rubber |
Cream rises to the top |
Sale of dairy activities |
Aerospace & defence |
3 July 2020 |
Share price performance
Business description
Next events
Analyst
Avon Rubber is a research client of Edison Investment Research Limited |
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The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/18 |
165.5 |
27.2 |
76.6 |
16.0 |
44.1 |
0.5 |
09/19 |
179.3 |
31.4 |
90.9 |
20.8 |
37.2 |
0.6 |
09/20e |
233.0 |
35.4 |
93.1 |
27.1 |
36.3 |
0.8 |
09/21e |
288.4 |
49.2 |
129.5 |
35.2 |
26.1 |
1.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Disposal of dairy on compelling terms
After transaction costs and tax, Avon will receive £160m of net proceeds. The terms of the sale are financially compelling for a business with below group average, mid-teen adjusted EBIT margins where we expect only moderate growth. The dairy activities were expected to account for just under 20% of sales and adjusted EBIT based on our FY22 estimates, and the disposal terms suggest FY22 multiples for EV/Sales of 3.3x, EV/EBITDA of 14.7x and EV/EBIT of 20.5x. At face value, the disposal is EPS dilutive by around 15% in a full year, as cash returns would likely be minimal. However, as management recycles the substantial but low-return cash balances created, it should prove accretive compared to the dairy activities. We think it is refreshing to see a management selling well, when the opportunity to invest appears limited at value-accretive terms. The deal is subject to regulatory approvals and should close in Q121 (Q4 CY20). Our forecasts remain unchanged until the deal completes.
Reinvestment in a focused defence core
Management should be able to use the proceeds to continue the growth strategy. The deal focuses Avon Rubber on its Avon Protection business, will allow a £20m payment to the pension fund, and pay down the RCF drawings following the Helmets and Armor acquisition in January 2020. It should leave Avon with a healthy cash balance, we estimate of c £150m at the end of FY21, with which to pursue its continued organic development and M&A opportunities, and adjacencies in the personal protection market to enhance its portfolio.
Valuation: Growing into its rating
While Avon is well rated compared to its defence peers, the ability to increase growth and cash generation by recycling the proceeds is central. Assuming value-creating investments are achieved, earnings metrics and cash-based valuations should return to more directly comparable levels.
Avon Protection becomes the sole focus
We have indicated the fundamental parameters of the deal on the front page, but think it is worth briefly exploring the future of the more focused Avon Rubber without dairy.
If we assume that the disposal releases £140m and that management is able to reinvest in businesses that can create value, using a WACC of 7.5% and tax of 19% as per our model, then these would add adjusted operating profit of at least £13m. That is over 30% more than dairy contributes to our future estimates. Of course, we would hope that management delivers a significantly better return on capital employed than WACC on new investment.
In addition, the calculation takes no account of the reduction to the pension deficit through the £20m payment on completion and the likely reduction in future deficit contribution cash payments.
The track record of current management is so far encouraging in terms of M&A. The acquisition of the new Helmets and Armor division on 2 January 2020 already appears to be at least meeting best expectations, with several new and legacy multi-year body armour contracts already announced.
When combined with an excellent competitive position in mask systems for Military applications, the future for organic growth looks encouraging, especially if supply of systems for non-US markets increases. In addition to the newer systems in the US that have seen multi-year contracts awarded in the last two years, the long-awaited sustainment programme to replenish the installed base of 2m M50 mask systems has now commenced.
On 24 June, Avon announced a sole-source requirements contract for the US DOD for the supply of M50 mask systems, spares and accessories. It has an initial value of $50m over a five-year period on commercial terms. The immediate near term requirement for the programme was reflected in the receipt of the first supply order under the contract that was awarded on 29 June 2020, with a value of $16.3m. Deliveries are to commence in H220 to meet immediate needs and the scale of the initial contract could be increased in the future given the lifecycle expectation of the systems. Additional supplemental contracts are expected to be added for other specific spares and accessories including filters, taking expected annual medium-term order intake for the M50 to the £25–35m range previously indicated. The award was already included in expectations for FY20 and FY21, so our forecasts remain unchanged.
With the strength of the sole-source position in mask systems in the US and the ability to develop international markets, we feel the reinvestment is likely to be made in suitable adjacencies to the personal protection markets for Military and First Responders, where Avon is already established.
Exhibit 1: Financial summary
Year end 30 September |
£m |
2018 |
2019 |
2020e |
2021e |
|
PROFIT & LOSS |
IFRS |
IFRS |
IFRS |
IFRS |
||
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) |
0.6 |
(5.2) |
(8.2) |
||
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
|
|
Research: TMT
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