Avon Rubber’s FY18 report demonstrates the success of the new business strategy, delivering growth across both divisions. The product portfolio has been updated and the company is winning contracts in new geographies. The company has also taken action to address its business structure and production footprint. We see continued opportunity for organic growth supported by selective bolt-on acquisitions.
FY18 reported revenue of £165.5m (FY17 £159.2m), equated to 8.7% growth at constant currency. FY18 adjusted operating profit of £27.3m (FY17 £26.1m) reflected profitable growth in both divisions, up 11.8% on a constant currency basis, demonstrating momentum behind the business strategy. FY18 adjusted EPS of 77.1p (FY17 83.8p) was fractionally down at constant currency due to a lower tax provision release versus FY17. However, FY18 dividend of 16.02p (FY17 12.32p) reflected management’s confidence in the business going forward. Cash conversion was strong at 108.2% of EBITDA, supported by the contribution from AEF disposal for $9.25m.
Avon has demonstrated success in winning orders on new programmes and geographies. The company expects to deliver growth through its three strategic priorities of growing the core, selective product development and value-enhancing acquisitions. There is a growing requirement from global defence agencies to address chemical, biological, radiological and nuclear (CBRN) threats and Avon has developed its product portfolio to address this. Additionally, while the dairy market is not without challenges, Avon is offering technology globally to improve yields and enable farmers to operate more efficiently and profitably.
Our DCF on a calculated WACC of 8.0% currently delivers a value of 1,532p, vs 1,499p previously. Our sum-of-the-parts valuation is shown as 1,878p. On our updated forecasts, Avon Rubber is currently trading on 16.4x FY19e P/E. This multiple looks undemanding versus the UK aerospace and defence peer group, which is deserved, given its exposure to the growing US defence budget environment. Avon’s position to address the heightened CBRN threat in the UK and overseas underpins the higher than average margin performance and future growth in our forecasts. Hence, we believe a valuation premium is justified.