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Avon Rubber — Equipped for growth

Avon Technologies (LSE: AVON)

Last close As at 05/08/2026

GBP19.16

▲ 28.00 (1.48%)

Market capitalisation

GBP572m

More on this equity

Avon Rubber — Equipped for growth

Avon Rubber’s Capital Markets Day highlighted the strength and depth of its product portfolio. Investment in both divisions has ensured that the company is able to address strong growth trends in its end-markets with attractive solutions. Avon Protection has received US regulatory approval for its Powered Air Purifying Respirator range, which should see further orders. Meanwhile, milkrite I InterPuls is offering solutions for productivity improvements to a dairy market increasingly open to technology.

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Written by

Avon Rubber

Equipped for growth

Capital markets day

Aerospace & defence

15 March 2018

Price

1,210p

Market cap

£380m

Net cash (£m) at 30 September 2017

24.7

Shares in issue

31.0m

Free float

96%

Code

AVON

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(1.1)

28.5

Rel (local)

0.5

2.6

30.4

52-week high/low

1,325p

909p

Business description

Avon Rubber designs, develops and manufactures products in the respiratory protection, defence (70% of 2017 sales) and dairy (30%) sectors. Its major contracts are with national security and safety organisations such as the DoD. 75% of sales are from the US and 25% are from Europe.

Next events

H118 results

2 May 2018

Analysts

Annabel Hewson

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Avon Rubber is a research client of Edison Investment Research Limited

Avon Rubber’s Capital Markets Day highlighted the strength and depth of its product portfolio. Investment in both divisions has ensured that the company is able to address strong growth trends in its end-markets with attractive solutions. Avon Protection has received US regulatory approval for its Powered Air Purifying Respirator range, which should see further orders. Meanwhile, milkrite I InterPuls is offering solutions for productivity improvements to a dairy market increasingly open to technology.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

142.9

20.7

70.5

9.5

17.1

0.8

09/17

163.2

25.6

82.3

12.3

14.7

1.0

09/18e

163.2

26.4

74.5

16.0

16.2

1.3

09/19e

169.2

28.1

74.7

20.8

16.1

1.7

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

Avon Protection addressing future threats

Avon Protection has developed its product range to not only significantly widen its addressable market but also to increase the sophistication and unit price point of its products. Avon may be selling the same number of units as before to a customer, but the higher unit contribution has a positive multiplier effect. Avon aims to introduce customers to its products and presents them with the opportunity to move up the product suite as demands arise. This also involves working closely with some customers to develop the best solution, which was the case with the Powered Air Purifying Respirator range. After recent regulatory approval, the first US customer for the range is a large federal law enforcement agency, which was involved in the development of the technology. Avon anticipates further orders from US customers in the near future.

milkrite I InterPuls driving productivity

milkrite I InterPuls provides solutions to farmers to address the multiple issues of milk quality, environmental impact, farm efficiency and profitability. The market backdrop is supportive, with rising global consumption of dairy products. As little as 15 years ago, farmers had to be convinced of the benefits of technology, whereas today they are asking what solutions are on offer. The division is scheduled to spend £1.5m on product development this year to ensure they are at the forefront of this evolution.

Valuation: Strategy still supports premium

Our DCF valuation on a calculated WACC of 8.0% currently delivers a value of 1,297p. On 16.2x 2018e P/E, the stock is trading at a discount to its UK aerospace and defence peer group. However, the company’s growth strategy, higher-than-industry-average profitability and building order book afford Avon Rubber the opportunity to deliver further medium-term upside earnings potential and hence justify a valuation premium, in our view.

Capital Markets Day

The London-based event started with an introductory presentation from CEO Paul McDonald. The four key objectives for the event were:

■

clearly illustrate the market drivers for Avon Protection and milkrite I InterPuls

■

demonstrate the importance of innovation to meeting customer needs

■

showcase the breadth and added value within the product range

■

establish the importance of technology in delivering Avon’s strategic objectives

A presentation and product demonstration for each division then followed in smaller groups.

Avon Protection

The table below captures the breadth of the current Avon Protection military portfolio. The suite has developed considerably over the last decade, such that in 2008 the company only offered the M50, FM53 and ST53 products. Today’s portfolio enables customers to be introduced via entry level products and in time move to more sophisticated options as appropriate. A visible benefit here is the step up in unit value, where Avon may be selling the same number of units as before to a customer but the higher unit contribution has a positive multiplier effect. The company’s decision to invest in selective product development is bearing fruit while now addressing a significantly larger market. In addition, with 20- to 30-year product lifecycles, it is important to ensure the product economics from the outset.

Exhibit 1: Avon Protection military portfolio applications 2018

Applications

M50

FM53

ST53

M53A1

FM54

ST53SD

MCM100

MDC150

EZAIR

MP-PAPR

CS-PAPR

CS-ELITE

Military operations

X

X

X

X

X

X

X

X

X

X

X

X

Counter narcotics operations

X

X

X

X

X

X

X

X

Special operations

X

X

X

X

X

X

X

X

X

X

Law enforcement operations

X

X

X

X

X

X

X

X

First responders

X

X

X

X

X

X

X

X

X

Critical national infrastructure protection

X

Other

X

X

Source: Avon Rubber

An exciting recent development is approval from the National Institute for Occupational Safety and Health in North America of the Powered Air Purifying Respirator range. The first US customer here is a large federal law enforcement agency, which itself was involved in the development of the technology. Avon anticipates further orders from US customers in the near future.

The presentation included a discussion on ‘future threats’ by chemical weapons expert Hamish de Bretton-Gordon. Including recent events in Salisbury, UK, 2018 has already witnessed the most frequent use of chemical weapons since the First World War. De Bretton-Gordon is the chemical, biological, radiological and nuclear adviser to the UK Ministry of Defence and he believes that the current events will affect the UK for the next 10 to 15 years. This increased threat coincides with underinvestment in this area over recent years, leaving military and first responders unprepared. Both the London Fire Brigade Commissioner Dany Cotton and the UK security minister Ben Wallace have stated publicly that a chemical weapon attack on London and the UK, respectively, is a significant and real concern to them. With personnel protection paramount, it is clear that Avon has the optimal portfolio to address the current threat.

milkrite I InterPuls

The milkrite I InterPuls presentation and product demonstration was focused on the dairy farm of the future, addressing the multiple issues of milk quality, environmental impact, farm efficiency and profitability. The market backdrop is supportive, with global consumption of dairy products expected to increase by 25% between 2015 and 2024. Milk production has been steadily growing at 2.3% on average every year since 2000 and the industry employs around 750 million people globally.

milkrite I InterPuls believes that driving operating efficiency with technology is the answer. So, it is less the Internet of Things, and rather the Internet of Cows. Milking cows within the most efficient time window is increasingly important, avoiding the estimated loss of £5 per day that occurs 300 days after calving. Tagging, tracking and monitoring cows permits a number of activities and actions to be monitored. Injured or ill cows can be quickly identified and separated for treatment. Feeding patterns can be analysed in addition to the optimal time for insemination, which is central to milking efficiency and profitability.

milkrite I InterPuls delivers solutions to farming customers, and its customers can be its best advertisement. We were shown an example of a Russian farmer who visited a farm in Italy that was using a milkrite I InterPuls system. Adopting a similar system at his own farm drove production up by 25% in just 12 months.

milkrite I InterPuls offers solutions with world-class products of its own in liners and pulsation equipment. This gives a strong installed base from which to leverage. In addition, we had greater detail on the leasing approach (Exchange) offered to farmers to reduce the time they have to change liners but also improve the regularity of changes. Typically, farmers will leave liners unchanged for longer than is advised, increasing the chance of damage and subsequent infection.

Overall, the market dynamic is changing in milkrite I InterPuls’ favour. As little as 15 years ago, farmers had to be convinced of the benefits of technology, whereas today they are asking what solutions are on offer. The division is scheduled to spend £1.5m on product development this year to ensure they are at the forefront of this evolution.

Exhibit 2: Financial summary

£000s

2016

2017

2018e

2019e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

142,884

163,200

163,226

169,153

Cost of Sales

(90,159)

(101,500)

(101,516)

(105,202)

Gross Profit

52,725

61,700

61,710

63,950

EBITDA

 

 

29,922

36,000

36,270

38,064

Operating Profit (before amort. and except.)

 

 

24,031

30,000

30,024

31,819

Intangible Amortisation

(3,154)

(4,200)

(3,372)

(3,300)

Exceptionals

(4,808)

(7,100)

(4,002)

(4,004)

Other

(33)

(35)

(36)

(38)

Operating Profit

16,036

18,665

22,613

24,476

Net Interest

(154)

(200)

(171)

(406)

Profit Before Tax (norm)

 

 

20,690

25,565

26,444

28,073

Profit Before Tax (FRS 3)

 

 

15,882

18,465

22,443

24,070

Tax

1,824

2,900

(3,147)

(4,581)

Profit After Tax (norm)

21,765

25,200

22,742

22,739

Profit After Tax (FRS 3)

17,706

21,365

19,296

19,489

Average Number of Shares Outstanding (m)

30.3

30.4

30.3

30.2

EPS - normalised (p)

 

 

70.5

82.3

74.5

74.7

EPS - (IFRS) (p)

 

 

58.5

70.2

63.6

64.5

Dividend per share (p)

9.5

12.3

16.0

20.8

Gross Margin (%)

36.9

37.8

37.8

37.8

EBITDA Margin (%)

20.9

22.1

22.2

22.5

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

16.8

18.4

18.4

18.8

BALANCE SHEET

Fixed Assets

 

 

77,469

66,700

63,087

56,557

Intangible Assets

47,357

40,400

36,928

33,634

Tangible Assets

30,112

26,300

26,158

22,924

Investments

0

0

0

0

Current Assets

 

 

52,886

80,500

97,015

120,907

Stocks

20,648

21,800

22,022

23,049

Debtors

19,968

23,800

23,804

24,668

Cash

4,495

26,500

42,990

64,990

Other

7,775

8,400

8,200

8,200

Current Liabilities

 

 

(36,641)

(39,000)

(38,466)

(43,652)

Creditors

(34,142)

(37,200)

(36,905)

(37,936)

Short term borrowings

(2,499)

(1,800)

(1,561)

(5,716)

Long Term Liabilities

 

 

(51,713)

(52,600)

(52,558)

(52,516)

Long term borrowings

0

0

0

0

Other long term liabilities

(51,713)

(52,600)

(52,558)

(52,516)

Net Assets

 

 

42,001

55,600

69,078

81,296

CASH FLOW

Operating Cash Flow

 

 

30,504

29,754

34,199

34,952

Net Interest

(147)

(154)

(200)

(171)

Tax

(17)

2,900

(3,147)

(4,581)

Capex

(6,838)

(5,500)

(9,005)

(6,017)

Acquisitions/disposals

(3,300)

0

0

0

Financing

(1,812)

(1,000)

(1,000)

(1,000)

Dividends

(2,430)

(3,200)

(4,118)

(5,339)

Other

(803)

(96)

0

0

Net Cash Flow

15,157

22,704

16,729

17,845

Opening net debt/(cash)

 

 

13,161

(1,996)

(24,700)

(41,429)

HP finance leases initiated

0

0

0

0

Other

0

0

0

(0)

Closing net debt/(cash)

 

 

(1,996)

(24,700)

(41,429)

(59,274)

Source: Avon Rubber accounts, Edison Investment Research


Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2018 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 Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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Germany

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US

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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