Avon Rubber: Encouraging H219 Momentum
Edison | Sep 18, 2019 08:49AM ET
In a pre-close statement ahead of Avon Rubber's (LON:AVON) FY19 year-end, management has indicated the strong momentum in Avon Protection continued through H219. Group performance was also supported by an improved trading environment for milkrite | InterPuls and favourable FX tailwinds. As a result, we have increased our FY19 sales growth estimate to 8% which, after a c £2m one-off non cash tax provision release, leads to a 12.4% increase in our EPS estimate. As the company enters FY20, the momentum is encouraging and should be enhanced when the 3M (NYSE:MMM) deal is completed. The shares have performed well since the proposed accretive deal was announced and warrant a premium to UK defence peers.
Strong H219 drives a modest upgrade
After the start of deliveries of the new US mask systems contracts won in early 2019, Avon Protection’s Military segment enjoyed a strong H219 performance. This was enhanced by the delivery of the $16.6m mask contract for the rest of the world customer announced in April. The strength more than offset softer demand in the US for Fire and Law Enforcement products. Following the weak Q119, the improvements in dairy markets seen in Q219 have continued through H219 and have allowed the expected flat year for milkrite | Interpuls to be achieved. Weaker sterling in Q419 increased the translation benefit from currency to around 4% for FY19. As a result FY19 group sales are expected to grow 8% compared to our prior assumption of 6.5%, and we have raised our FY19 estimates accordingly. One modest negative is in cash flow as the overseas mask invoicing extended over the year end. We expect the payments to be received in Q120. In addition, £2m was expensed against initial 3M (NYSE:MMM) ballistic protection deal costs.
3M (NYSE:MMM) deal should add to organic development
The improved dairy performance should add to the positive momentum expected in Avon Protection in FY20. We expect Military growth to be augmented by improved volumes for the Fire and Law Enforcement segments as the issues constraining FY19 wane. If current FX rates are maintained there should also be a more modest tailwind in FY20. The initial contribution from the 3M (NYSE:MMM) ballistic protection assets being acquired should further expand FY20 estimates.
Get The News You Want
Valuation: Justified premium to peers
The FY20 P/E ratio of 19.0x should drop significantly when the enhancement of the purchase from 3M (NYSE:MMM) is included following completion in H120. The stock would still be trading at a justifiable premium to UK defence peers given the growth being delivered accompanied by the progressive dividend policy.
Share price performance
Business description
Avon Rubber designs, develops and manufactures products in the protection (70% of 2018 sales) and dairy (30%) sectors. Its major contracts are with national security organisations such as the US DOD. Over 70% of 2018 sales were from the US.
Estimates upgraded modestly
With modestly higher than anticipated sales growth and the expected improvement in EBITDA margins, we increase our FY19 PBT estimate by 2.3%. At the EPS level there is a one-off tax non cash provision release worth around £2m (or 6.5p per share) which reduces the effective tax rate to 11% before reverting to more normal rates in FY20. As a result our FY19 EPS estimate rises by 12.4% to 88.4p. The higher FY19 trading base drives a modest improvement in our FY20 forecasts with EPS increased by 2.2%. The weaker expected cash performance in FY19 should reverse in FY20 leaving our net cash expectation at the end of the two-year forecast period almost unchanged.
As is our normal practice, we will incorporate the acquisition of the 3M (NYSE:MMM) ballistic protection assets in our estimates when the deal has completed. It is expected to significantly enhance returns from the point of initial consolidation (see our note Purchase of 3M’s ballistic protection business ).
In a pre-close statement ahead of Avon Rubber’s FY19 year end, management has indicated the strong momentum in Avon Protection continued through H219. Group performance was also supported by an improved trading environment for milkrite | InterPuls and favourable FX tailwinds. As a result, we have increased our FY19 sales growth estimate to 8% which, after a c £2m one-off non cash tax provision release, leads to a 12.4% increase in our EPS estimate. As the company enters FY20, the momentum is encouraging and should be enhanced when the 3M (NYSE:MMM) deal is completed. The shares have performed well since the proposed accretive deal was announced and warrant a premium to UK defence peers.
Strong H219 drives a modest upgrade
After the start of deliveries of the new US mask systems contracts won in early 2019, Avon Protection’s Military segment enjoyed a strong H219 performance. This was enhanced by the delivery of the $16.6m mask contract for the rest of the world customer announced in April. The strength more than offset softer demand in the US for Fire and Law Enforcement products. Following the weak Q119, the improvements in dairy markets seen in Q219 have continued through H219 and have allowed the expected flat year for milkrite | Interpuls to be achieved. Weaker sterling in Q419 increased the translation benefit from currency to around 4% for FY19. As a result FY19 group sales are expected to grow 8% compared to our prior assumption of 6.5%, and we have raised our FY19 estimates accordingly. One modest negative is in cash flow as the overseas mask invoicing extended over the year end. We expect the payments to be received in Q120. In addition, £2m was expensed against initial 3M (NYSE:MMM) ballistic protection deal costs.
3M (NYSE:MMM) deal should add to organic development
The improved dairy performance should add to the positive momentum expected in Avon Protection in FY20. We expect Military growth to be augmented by improved volumes for the Fire and Law Enforcement segments as the issues constraining FY19 wane. If current FX rates are maintained there should also be a more modest tailwind in FY20. The initial contribution from the 3M (NYSE:MMM) ballistic protection assets being acquired should further expand FY20 estimates.
Get The News You Want
Valuation: Justified premium to peers
The FY20 P/E ratio of 19.0x should drop significantly when the enhancement of the purchase from 3M (NYSE:MMM) is included following completion in H120. The stock would still be trading at a justifiable premium to UK defence peers given the growth being delivered accompanied by the progressive dividend policy.
Share price performance
Business description
Avon Rubber designs, develops and manufactures products in the protection (70% of 2018 sales) and dairy (30%) sectors. Its major contracts are with national security organisations such as the US DOD. Over 70% of 2018 sales were from the US.
Estimates upgraded modestly
With modestly higher than anticipated sales growth and the expected improvement in EBITDA margins, we increase our FY19 PBT estimate by 2.3%. At the EPS level there is a one-off tax non cash provision release worth around £2m (or 6.5p per share) which reduces the effective tax rate to 11% before reverting to more normal rates in FY20. As a result our FY19 EPS estimate rises by 12.4% to 88.4p. The higher FY19 trading base drives a modest improvement in our FY20 forecasts with EPS increased by 2.2%. The weaker expected cash performance in FY19 should reverse in FY20 leaving our net cash expectation at the end of the two-year forecast period almost unchanged.
As is our normal practice, we will incorporate the acquisition of the 3M (NYSE:MMM) ballistic protection assets in our estimates when the deal has completed. It is expected to significantly enhance returns from the point of initial consolidation (see our note Purchase of 3M’s ballistic protection business ).
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.