Avon Protection — Unmasking its growth potential

Avon Protection (AVON)

Last close As at 01/03/2024

1,137.00

22.00 (1.97%)

Market capitalisation

344m

More on this equity

Research: Industrials

Avon Protection — Unmasking its growth potential

Avon Protection’s capital markets day highlighted its continued focus on medium-term margin expansion (targeting operating margin of 14–16%), concentrating on its core business of respirators and head protection. The unwinding of the armour business, alongside the consolidation of Team Wendy (acquired in H220) should enable Avon to benefit from rising global defence spending. Its strong relationship with the US DoD, and organic growth opportunities with recurring revenue from necessary product replacements, should bolster its medium-term target for ROIC to exceed 17%, which would surpass the average of UK defence peers.

Natalya Davies

Written by

Natalya Davies

Analyst

Industrials

Avon Protection

Unmasking its growth potential

Aerospace and defence

QuickView

12 February 2024

Price

£8.95

Market cap

£271m

Share price graph

Share details

Code

AVON

Listing

LSE

Shares in issue

30.3m

Business description

Avon Protection designs, develops and manufactures personal protection products for Military and First Responder markets focusing on respiratory mask systems and helmets. Its main customers are national security agencies such as the US Department of Defense (DoD) and c 70% of sales are from the United States.

Bull

Geopolitical conflicts likely to continue to drive an expansion in military budgets for NATO countries.

Strong order backlog exceeding $180m, with a diverse portfolio of technologically advanced products

Innovative technology with 69 patents across the whole company (and 25 pending).

Bear

Customer concentration risk with c 50% of revenue from the US military.

Sensitive to government and defence budgets.

ESG criteria risk undermining defence sector.

Analysts

Natalya Davies

+44 (0)20 3077 5700

Andrew Keen

+44 (0)20 3077 5700

Avon Protection’s capital markets day highlighted its continued focus on medium-term margin expansion (targeting operating margin of 14–16%), concentrating on its core business of respirators and head protection. The unwinding of the armour business, alongside the consolidation of Team Wendy (acquired in H220) should enable Avon to benefit from rising global defence spending. Its strong relationship with the US DoD, and organic growth opportunities with recurring revenue from necessary product replacements, should bolster its medium-term target for ROIC to exceed 17%, which would surpass the average of UK defence peers.

Cash flow visibility with product replenishment

Avon is strategically well-positioned now its armour business has been discontinued, leaving it to a focus on organic growth within its core respiratory and head protection divisions (medium-term revenue target of greater than 5% CAGR). Contract extensions with the DoD (forecast to 2030), alongside the inevitable need for product replenishment, provide some degree of long-term cash flow visibility. Head protection suffered a loss in FY23, although this should recover in the short term with the roll-out of next-generation ballistic helmets including the NG IHPS to the US Army and ACH GEN II to the US Defense Logistics Agency (combined orderbook of $120m). Respiratory protection has the potential to recover through the launch of the MiTR mask and goggle system, tailored to address evolving threats (tear gas, Fentanyl), with an accessible market of c $200m.

Accelerating demand for military protection

Global geopolitical tensions have sparked higher defence spending by the US DoD and NATO countries. The need for military protection is critical, with ballistic military helmet and respirator demand expected by Avon to experience a CAGR of c 4% from 2024–28, representing a significant boost to Avon’s growth prospects. This is reflected in its order backlog of over $180m (a decade high), partially attributable to a rise in head protection orders with c $60m of orders for NG IHPS and over $20m for ACH GEN II. Delivery ramp-ups combined with inventory turnover improvement and anticipated $10m annualised cost savings from the Irvine site closure should help boost operating margins to the targeted c 15% level.

Valuation: Growth prospects not reflected in rating

Avon’s share price over the last year has markedly lagged the broader UK defence sector, declining 6.3% (average: +23.8%), despite the growth prospects of the group having increased significantly. Nevertheless, there is uncertainty as to when Avon’s transformation programme will lead to meaningful margin improvement. It trades at a 2025e P/E of 16.6x compared to the peer average of 14.2x.

Consensus estimates

Year
end

Revenue
($m)

PBT
($m)

EPS
($)

DPS
($)

P/E
(x)

Yield
(%)

12/22

271.9

6.1

0.20

0.45

56.5

4.0

12/23

243.8

14.0

0.40

0.30

28.3

2.7

12/24e

263.0

20.3

0.53

0.27

21.3

2.4

12/25e

278.7

26.2

0.68

0.29

16.6

2.6

Source: Refinitiv

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

Exclusion of liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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