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 deal is completed. The shares have performed well since the proposed accretive deal was announced and warrant a premium to UK defence peers.
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 ballistic protection deal costs.
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 ballistic protection assets being acquired should further expand FY20 estimates.
The FY20 P/E ratio of 19.0x should drop significantly when the enhancement of the purchase from 3M 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.