Guidance for FY19 is maintained after a slow H119 as recent major multi-year mask orders commence delivery in H219, accelerating Avon Protection’s growth and more than compensating for the weaker than expected milkrite | InterPuls performance. However, even here a rebound in H219 will further skew the half-yearly split. Despite the divisional mix shift, our overall estimates remain unchanged. While H119 was tough, the outlook is promising as the company continues to grow the core, focus on selective new product development and search for M&A opportunities. In our opinion, the full year progression warrants the premium rating Avon enjoys, but H2 execution and momentum into FY20 is key.
As previously noted by management, a variety of factors served to depress performance in H119, with both divisions delivering reduced profitability. In Avon Protection, only Military revenues showed progress boosted by sales to the Rest of the World. DoD sales declined due to a fall in low-margin M50 volumes and adverse phasing of spares and accessories, which still grew as a proportion of divisional sales, reducing margin. The Law Enforcement and Fire segments were depressed by the prolonged partial shutdown of the US government. Dairy market conditions saw lower milk prices in Q119 adversely affected milkrite | InterPuls, although milk prices and sentiment improved through Q219. Overall H119 group revenues declined 5.3% to £73.6m, and adjusted operating profit fell 25% to £8.7m, a £3.9m decline.
The good news came in the form of burgeoning Military orders at Avon Protection, stronger opening backlogs elsewhere for H219 including encouraging signs of an H219 recovery in milkrite | InterPuls, a strong financial position with £46.8m of net cash at the period end, and the 30% hike in the interim dividend. Management maintains expectations that Military sales should accelerate in H219, with stronger margins due to better pricing for new product volumes. We expect DoD sales to rise around 25% in H219 compared to H119, with a continued strong performance in the Rest of the World. The Law Enforcement, Fire and dairy segments also rebound and, while we have shifted our divisional mix, our estimates are maintained.
Avon is currently trading on an FY20e P/E rating of 16.6x, a significant premium to many UK peers. However, the momentum of the H219 recovery should provide a basis for growth in FY20 as multi-year contracts increase volumes and margins. The dividend policy designed to reduce cover over the cycle is also supportive.