The latest body armour contract for the US Defense Logistics Agency is for up to $333m, to be delivered over 3.5 years for a legacy product. Avon had identified it as an incremental value-creating opportunity which, when won, would trigger the contingency consideration of up to $25m for the Helmets and Armor business acquired at the start of 2020. We have increased our FY21 EPS estimates by 13% following the award of the first delivery contract. Avon operates in defence and dairy markets that should be relatively resilient as they are deemed essential in the US, UK and Italy.
While not immune to the impacts of COVID-19, Avon’s two main markets are defence and dairy, which are classified as essential by the US, UK and Italian governments. As the pandemic progresses, it is possible that some production interruptions may occur, but at present the impact has been limited. The Chinese distribution operation has reopened, and European and North American operations might need to react for staff safety at times going forward.
The latest contract award from the DOD for body armour inserts for small arms protection is worth between $19m and $333m for delivery over the 2021–23 period. It is the legacy product contract that had been identified at the time of the purchase of the new Helmets and Armor business at the start of 2020 which triggers the contingency consideration element of up to $25m. $3m is due immediately and the balance is payable dependent on the scale of delivery orders received. Avon will initiate $5m of additional capex spread over FY20 and FY21 to support all of the recent Helmets and Armor contracts, meaning a higher cash outflow in FY20 as deliveries do not commence until early 2021. As winning the legacy contract was not in guidance, we have marginally increased our finance costs for FY20, and have increased our FY21 EPS estimates by 13% to reflect $40m of off-take after the start of deliveries next year following receipt of the first $20m supply contract. FX could provide a further tailwind if the current weakness of sterling is maintained.
Avon has seen a major re-rating over the last 12 months and has been resilient in recent market turmoil, but not immune. That probably fairly reflects the current uncertain macroeconomic outlook and the defensive strategic position of the group in defence and dairy markets. We feel the greatest risk is the longer-term economic fallout that the current stimulus may have on future budget levels.