Avon Rubber’s pre-close trading statement demonstrates the underlying growth in both divisions. Success continues to flow from the enhanced product portfolio and order progression is building visibility. We have made modest changes to our forecasts to reflect currency and the Merrick’s acquisition.
Avon’s pre-close trading update reflects the strength in its protection markets, with expected full year divisional revenue growth of c 7% on a constant currency basis. This includes slightly higher than guidance deliveries of M50 mask systems to the US Department of Defense. While activity in the law enforcement area has continued to deliver growth, the fire business has continued to reflect the market softness seen in H118. milkrite I InterPuls has seen a step-up in performance in H218, particularly in North America, and is on track to deliver revenue growth of c 4% on a constant currency basis. In June, the company completed the acquisition of the distribution rights to Merrick’s calf nurser product line for $2.1m.
We have made modest adjustments to our model to reflect the better than expected dollar translation rate for FY18 and the acquisition of Merrick’s. Looking forward, improved product mix and operational leverage should support operating margin growth in both divisions. For FY19, in the Protection division we reflect the substantial carry-over of 83,000 M50 mask systems plus future success with the M69 Joint Services Aircrew Mask and the M53A1 combined tactical mask and PAPR system. For milkrite I InterPuls, while the Merrick’s acquisition is supportive, we maintain some caution as we keep a watch on feedstock pricing.
Taking an average of our DCF and our sum-of-the-parts valuations gives a fair value price of 1,499p vs 1,450p previously. This reflects the uplift in peer group multiples. On a FY18e P/E of 18.7x, the stock continues to trade at a premium to its UK aerospace and defence peer group. We feel this premium is justified given its exposure to the growing US defence budget environment and the heightened chemical, biological, radiological and nuclear (CBRN) global threat.