Last close As at 05/08/2026
GBP18.88
▲ 108.00 (6.07%)
Market capitalisation
GBP572m
The latest body armour contract for the US Defense Logistics Agency is for up to $333m, to be delivered over 3.5 years for a legacy product. Avon had identified it as an incremental value-creating opportunity which, when won, would trigger the contingency consideration of up to $25m for the Helmets and Armor business acquired at the start of 2020. We have increased our FY21 EPS estimates by 13% following the award of the first delivery contract. Avon operates in defence and dairy markets that should be relatively resilient as they are deemed essential in the US, UK and Italy.
Written by
Avon Rubber |
Further backlog development |
Body armour contract award |
Aerospace & defence |
27 March 2020 |
Share price performance
Business description
Next events
Analyst
Avon Rubber is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||
The latest body armour contract for the US Defense Logistics Agency is for up to $333m, to be delivered over 3.5 years for a legacy product. Avon had identified it as an incremental value-creating opportunity which, when won, would trigger the contingency consideration of up to $25m for the Helmets and Armor business acquired at the start of 2020. We have increased our FY21 EPS estimates by 13% following the award of the first delivery contract. Avon operates in defence and dairy markets that should be relatively resilient as they are deemed essential in the US, UK and Italy.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/18 |
165.5 |
27.2 |
76.6 |
16.0 |
31.4 |
0.7 |
09/19 |
179.3 |
31.4 |
90.9 |
20.8 |
26.5 |
0.9 |
09/20e |
233.0 |
35.4 |
93.1 |
27.1 |
25.8 |
1.1 |
09/21e |
288.4 |
49.2 |
129.5 |
35.2 |
18.6 |
1.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Before adoption of IFRS 16.
Essential supplier as COVID-19 creates uncertainty
While not immune to the impacts of COVID-19, Avon’s two main markets are defence and dairy, which are classified as essential by the US, UK and Italian governments. As the pandemic progresses, it is possible that some production interruptions may occur, but at present the impact has been limited. The Chinese distribution operation has reopened, and European and North American operations might need to react for staff safety at times going forward.
Legacy contract win should enhance from FY21
The latest contract award from the DOD for body armour inserts for small arms protection is worth between $19m and $333m for delivery over the 2021–23 period. It is the legacy product contract that had been identified at the time of the purchase of the new Helmets and Armor business at the start of 2020 which triggers the contingency consideration element of up to $25m. $3m is due immediately and the balance is payable dependent on the scale of delivery orders received. Avon will initiate $5m of additional capex spread over FY20 and FY21 to support all of the recent Helmets and Armor contracts, meaning a higher cash outflow in FY20 as deliveries do not commence until early 2021. As winning the legacy contract was not in guidance, we have marginally increased our finance costs for FY20, and have increased our FY21 EPS estimates by 13% to reflect $40m of off-take after the start of deliveries next year following receipt of the first $20m supply contract. FX could provide a further tailwind if the current weakness of sterling is maintained.
Valuation: More defensive than some
Avon has seen a major re-rating over the last 12 months and has been resilient in recent market turmoil, but not immune. That probably fairly reflects the current uncertain macroeconomic outlook and the defensive strategic position of the group in defence and dairy markets. We feel the greatest risk is the longer-term economic fallout that the current stimulus may have on future budget levels.
Estimate revisions
While it is not apparent from the table below, our EPS is marginally reduced by an increased finance charge due to increased capex and the additional consideration paid in FY20, hence the £4.3m increase in our adjusted net debt estimate (before adoption of IFRS 16). In FY21, earnings are increased by 12.9% as contract deliveries start in early calendar 2021. As we have assumed further supply contracts are awarded later in 2020, we have added $40m to revenues for FY21 achieving just below Avon Protection’s divisional margin. With a three-year sales value of $333m, we expect revenues to grow in FY22 and FY23. Of course, the contingency consideration progressively escalates to the maximum total of $25m as confirmed supply contacts are awarded, but we expect that additional investment to prove value creating for investors. There will be the second tranche of the additional $5m capex to absorb and we expect another $3m of contingency payment, so net cash is reduced at the year-end compared to our previous forecast, despite improving operational cash flows.
Exhibit 1: Avon Rubber revisions to earnings estimates
Year to September (£m) |
2020e |
2021e |
||||
|
Prior |
New |
% change |
Prior |
New |
% change |
Avon Protection |
179.8 |
179.8 |
0.0% |
201.7 |
233.6 |
15.8% |
milkrite I InterPuls |
53.2 |
53.2 |
0.0% |
54.8 |
54.8 |
0.0% |
Total Sales |
233.0 |
233.0 |
0.0% |
256.4 |
288.4 |
12.5% |
|
|
|
|
|
|
|
EBITDA |
47.3 |
47.4 |
0.2% |
55.4 |
62.1 |
12.1% |
|
|
|
|
|
|
|
Avon Protection |
31.4 |
31.4 |
0.0% |
38.5 |
44.1 |
14.6% |
milkrite I InterPuls |
8.1 |
8.1 |
0.0% |
8.5 |
8.5 |
0.0% |
Unallocated |
(3.0) |
(3.0) |
0.0% |
-3.1 |
(3.1) |
0.0% |
Adjusted EBITA |
36.6 |
36.6 |
0.0% |
44.0 |
49.6 |
12.8% |
|
|
|
|
|
|
|
Adjusted PBT |
35.4 |
35.4 |
0.0% |
43.6 |
49.2 |
12.9% |
|
|
|
|
|
|
|
EPS - adjusted fully diluted (p) |
93.1 |
93.1 |
0.0% |
114.7 |
129.5 |
12.9% |
DPS (p) |
27.1 |
27.1 |
0.0% |
35.2 |
35.2 |
0.0% |
Net debt/(cash) |
4.4 |
8.7 |
97.1% |
(16.4) |
(12.1) |
-25.9% |
Source: Edison Investment Research estimates, all before adoption of IFRS 16
The company has indicated that the adoption of IFRS 16 will see the creation of a right-of-use asset of £7.0m and capitalised lease liabilities of £11.1m. Adjusting for a £0.7m increase in the deferred tax assets leads to a reduction in net assets on transition of £3.0m at the start of FY20. The adjustments to the P&L would have inflated EBITDA by £2.0m, but had only a marginal effect on adjusted net income and EPS.
We note that Avon Rubber essentially grew revenues through the financial crisis, albeit a smaller entity at the time. It still appears to be more defensively positioned in the near term than many other companies.
Exhibit 2: Financial summary
£000s |
2018 |
2019 |
2020e |
2021e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
165,500 |
179,300 |
232,976 |
288,375 |
Cost of Sales |
(99,900) |
(106,800) |
(138,772) |
(171,770) |
||
Gross Profit |
65,600 |
72,500 |
94,204 |
116,604 |
||
EBITDA |
|
|
35,300 |
39,500 |
47,427 |
62,124 |
Operating Profit (before amort. and except.) |
|
|
30,400 |
35,100 |
40,960 |
54,555 |
Intangible Amortisation |
(3,100) |
(3,800) |
(4,345) |
(4,918) |
||
Operating profit (company definition) |
27,300 |
31,300 |
36,615 |
49,637 |
||
Exceptionals |
(5,600) |
(17,700) |
(8,000) |
(6,300) |
||
Other |
(100) |
(100) |
(100) |
(100) |
||
Operating Profit |
21,600 |
13,500 |
28,515 |
43,237 |
||
Net Interest |
0 |
200 |
(1,159) |
(331) |
||
Profit Before Tax (norm) |
|
|
27,200 |
31,400 |
35,356 |
49,206 |
Profit Before Tax (FRS 3) |
|
|
21,600 |
13,700 |
27,356 |
42,906 |
Tax |
(1,800) |
600 |
(5,198) |
(8,152) |
||
Profit After Tax (norm) |
23,500 |
28,000 |
28,638 |
39,857 |
||
Profit After Tax (FRS 3) |
19,800 |
14,300 |
22,158 |
34,754 |
||
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 |
22.0 |
20.4 |
21.5 |
||
Operating Margin (before GW and except.) (%) |
18.4 |
19.6 |
17.6 |
18.9 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
64,100 |
56,700 |
131,971 |
129,826 |
Intangible Assets |
41,500 |
35,300 |
59,180 |
55,971 |
||
Tangible Assets |
22,600 |
21,400 |
72,791 |
73,855 |
||
Investments |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
102,000 |
117,000 |
109,157 |
100,616 |
Stocks |
23,000 |
20,700 |
27,166 |
33,962 |
||
Debtors |
24,200 |
35,400 |
34,067 |
42,167 |
||
Cash |
46,600 |
48,400 |
35,425 |
11,987 |
||
Other |
8,200 |
12,500 |
12,500 |
12,500 |
||
Current Liabilities |
|
|
(41,400) |
(36,600) |
(91,191) |
(57,550) |
Creditors |
(41,300) |
(36,500) |
(47,023) |
(57,709) |
||
Short term borrowings |
(100) |
(100) |
(44,168) |
159 |
||
Long Term Liabilities |
|
|
(39,900) |
(50,700) |
(50,643) |
(50,586) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(39,900) |
(50,700) |
(50,643) |
(50,586) |
||
Net Assets |
|
|
84,800 |
86,400 |
99,294 |
122,305 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
33,400 |
15,200 |
48,451 |
57,705 |
Net Interest |
(200) |
0 |
(1,159) |
(331) |
||
Tax |
(1,800) |
600 |
(5,198) |
(8,152) |
||
Capex |
(8,900) |
(7,900) |
(18,683) |
(15,842) |
||
Acquisitions/disposals |
5,100 |
0 |
(72,400) |
(2,400) |
||
Financing |
(1,100) |
(1,300) |
(1,000) |
(1,000) |
||
Dividends |
(4,100) |
(5,400) |
(7,055) |
(9,090) |
||
Other |
(600) |
600 |
0 |
0 |
||
Net Cash Flow |
21,800 |
1,800 |
(57,043) |
20,889 |
||
Opening net debt/(cash) |
|
|
(24,700) |
(46,500) |
(48,300) |
8,743 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
(46,500) |
(48,300) |
8,743 |
(12,146) |
Source: Company reports, Edison Investment Research estimates, all figures pre-adoption of IFRS 16
|
|
Research: Industrials
We expect further progress from Carbios in 2020, with the start of construction of its PET demonstration plant and the commercial launch of Evanesto by Carbiolice. Following the FY19 rights issue, raising €13.8m (net), Carbios enters 2020 in a sound financial position, with sufficient resources to finance the business over the next 12 months. Our DCF valuation remains c €13/share.