Last close As at 06/08/2026
GBP19.16
▲ 28.00 (1.48%)
Market capitalisation
GBP572m
Avon started FY18 with a new growth strategy and it is bearing fruit. Order growth is strong as the company is leveraging market dynamics across both divisions. We adjust our forecasts for the more favourable US tax reform, increasing underlying EPS by 7% and 1% in FY18 and FY19 respectively. Management is confident of achieving FY18 expectations.
Written by
Avon Rubber |
Strong start to the year |
AGM trading update |
Aerospace & defence |
1 February 2018 |
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Business description
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Avon started FY18 with a new growth strategy and it is bearing fruit. Order growth is strong as the company is leveraging market dynamics across both divisions. We adjust our forecasts for the more favourable US tax reform, increasing underlying EPS by 7% and 1% in FY18 and FY19 respectively. Management is confident of achieving FY18 expectations.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
142.9 |
20.7 |
70.5 |
9.5 |
17.8 |
0.8 |
09/17 |
163.2 |
25.6 |
82.3 |
12.3 |
15.2 |
1.0 |
09/18e |
163.2 |
26.5 |
74.6 |
16.0 |
16.8 |
1.3 |
09/19e |
169.2 |
28.2 |
75.0 |
20.8 |
16.7 |
1.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Order momentum
As we reported at the start of the week (Positive order progression), order momentum in the first four months of the year at Avon has been encouraging and is building visibility. In addition to order success with existing products (eg M50), Avon Protection secured its first commercial orders for its MCM100 underwater rebreather, increasing the product portfolio of the business. Powered Air product sales have grown in Europe for law enforcement markets and securing NIOSH safety standards in Q218 will set the groundwork to build sales in the US market. For milkrite I InterPuls, lower feed prices have offset milk price softness. An improved investment backdrop is driving revenue growth in Precision Control & Intelligence and Farm Services, the latter at an exciting time with service launches.
Minor adjustments to numbers
Sterling strength has a translational impact on FY18 versus previous guidance, being offset by further operational progress and leaving sales and operating expectations as before. However, we have adjusted our forecasts for the more favourable US tax backdrop. Our tax assumption for FY18 moves to 14% from 20% previously resulting in uplift in FY18 normalised EPS to 74.6p from 69.4p. For FY19, our tax assumption moves to 19% from 20% resulting in a more marginal uplift in EPS to 75.0p from 74.1p. The lower tax rate in FY18 includes a one-off favourable revaluation of the US net deferred tax liability and provision release; hence 19% is expected to be the adjusted effective rate going forward. Our FY18 net cash estimate improves to £44.8m from £43.4m previously. We do not make any other changes to our forecasts.
Valuation: Strategy supports premium
Our DCF valuation on a calculated WACC of 7.9% currently delivers a value of 1,259p, up from 1,226p, on our revised forecasts. On 16.8x 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.
Exhibit 1: 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 |
36,095 |
38,048 |
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) |
(139) |
(317) |
||
Profit Before Tax (norm) |
|
|
20,690 |
25,565 |
26,476 |
28,163 |
Profit Before Tax (FRS 3) |
|
|
15,882 |
18,465 |
22,474 |
24,159 |
Tax |
1,824 |
2,900 |
(3,152) |
(4,598) |
||
Profit After Tax (norm) |
21,765 |
25,200 |
22,769 |
22,812 |
||
Profit After Tax (FRS 3) |
17,706 |
21,365 |
19,323 |
19,562 |
||
Average Number of Shares Outstanding (m) |
30.3 |
30.4 |
30.3 |
30.2 |
||
EPS - normalised (p) |
|
|
70.5 |
82.3 |
74.6 |
75.0 |
EPS - (IFRS) (p) |
|
|
58.5 |
70.2 |
63.7 |
64.7 |
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 |
22.1 |
22.5 |
||
Operating Margin (before GW and except.) (%) |
16.8 |
18.4 |
18.4 |
18.8 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
77,469 |
66,700 |
59,758 |
52,928 |
Intangible Assets |
47,357 |
40,400 |
36,928 |
33,634 |
||
Tangible Assets |
30,112 |
26,300 |
22,829 |
19,294 |
||
Investments |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
52,886 |
80,500 |
100,015 |
123,907 |
Stocks |
20,648 |
21,800 |
22,022 |
23,049 |
||
Debtors |
19,968 |
23,800 |
23,804 |
24,668 |
||
Cash |
4,495 |
26,500 |
45,990 |
67,990 |
||
Other |
7,775 |
8,400 |
8,200 |
8,200 |
||
Current Liabilities |
|
|
(36,641) |
(39,000) |
(38,110) |
(42,923) |
Creditors |
(34,142) |
(37,200) |
(36,905) |
(37,936) |
||
Short term borrowings |
(2,499) |
(1,800) |
(1,205) |
(4,987) |
||
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 |
69,106 |
81,396 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
30,504 |
29,754 |
34,055 |
35,124 |
Net Interest |
(147) |
(154) |
(200) |
(139) |
||
Tax |
(17) |
2,900 |
(3,152) |
(4,598) |
||
Capex |
(6,838) |
(5,500) |
(5,501) |
(5,701) |
||
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 |
20,085 |
18,218 |
||
Opening net debt/(cash) |
|
|
13,161 |
(1,996) |
(24,700) |
(44,785) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
(1,996) |
(24,700) |
(44,785) |
(63,003) |
Source: Avon Rubber accounts, Edison Investment Research
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