Avon Rubber has delivered a confident FY17 performance and has set out a clear threefold strategy to drive medium-term growth. The core business is buoyed by strong order activity in Protection while dairy market trends look set to stay positive into 2018. Cash performance has also been solid, which underpins selective future acquisitions.
Reported FY17 orders of £173.9m were 6.6% ahead of reported FY17 revenue of £163.2m (FY16: £142.9m). This equated to 4.5% revenue growth at constant currency and against consensus of £165.4m and Edison’s estimate of £168.9m. Reported PBT of £25.6m (FY16: £20.7m), was marginally ahead of consensus of £25.0m and Edison’s estimate of £25.0m. FY17 adjusted EPS was 82.8p (FY16: 71.9p) and the final dividend of 8.21p gave a total dividend per share for FY17 of 12.32p (FY16: 9.48p). Going forward, the Avon Protection division is bolstered by a building order book and ongoing proactive negotiations with the US Department of Defense (DoD) to drive business beyond FY18. Trends in the law enforcement market also remain supportive. Meanwhile, improved milk prices and low feed costs both build into a better dairy market for the milkrite | InterPuls division. Programme changes and a currency headwind prompt us to revise down our FY18 estimates. We now forecast the top line largely flat on FY17, with the improved product mix and operational leverage driving EBIT margin improvement. We forecast a return to top-line growth in FY19.
The significantly changed management team has developed a new, threefold growth strategy. The approach is to grow the core, add selective product development and make value-enhancing acquisitions to accelerate growth. While innovation is key to the business, the overall level of investment will be lower in total but more focused in nature. Avon is already leveraging acquisitions made in recent years, and future deals will become an increasing feature of future strategy
Our DCF valuation on a calculated WACC of 7.9% currently delivers a value of 1,226p on our revised forecasts. On 15.3x 2018e P/E, the stock is trading at a discount to its UK aerospace and defence peer group. However, the new 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.