Avon has announced that it has been awarded a sole source contract to supply the US Department of Defense (DoD) with M69 Joint Service Aircrew Mask Systems for Strategic Aircraft with a maximum value of $92.7m over up to seven years. As flagged at the FY18 results, it is a significant contract for Avon Protection’s military activities and should make an initial revenue contribution in FY19 once the first order is received in the near future. Using our estimates, Avon is trading on a FY20 P/E of 14.6x, a justifiable premium to its aerospace and defence peer group given its above average margins and improving growth prospects.
The award of the supply contract for M69 mask systems comes after a collaborative development programme with the DoD.The award is an IDIQ (indefinite delivery/indefinite quantity) contract with an initial term of five years and two one-year extension options. The contract is to supply up to 30,349 mask systems together with related accessories and spares on a firm fixed price basis, with engineering support provided over the life of the contract on a cost plus basis.
Management expects to receive the first order under this contract before the end of this month and to commence deliverybefore the year end. It had been highlighted by management as a potential new contract award and thus is already included in expectations, but nevertheless this provides a strong start to calendar 2019.
The company also indicates that it continues to pursue a number of military opportunities with both the DOD and other customers worldwide. The award suggests that the anticipated uptick in global defence spending is starting to bear fruit for Avon especially in the US.