The trading update released with the AGM indicates that growth in Avon Protection is continuing to offset challenging conditions for milkrite | Interpuls in dairy markets. As a result, management’s expectations for the full year are maintained and our group estimates are unchanged. The shares trade on a modest FY20 P/E premium to defence peers, which we feel is warranted by higher margins and growth in cash flow and EPS.
In Avon Protection, the strength of performance for Military is offsetting some H119 shortfalls for Law Enforcement and Fire resulting from the US government shutdown. The weaker areas are expected to recover in H219, assuming a resolution to the disruption has been reached. Military should also see continued growth in H219. First deliveries against the M69 aircrew mask systems contract should be made in H219, with first orders against the IDIQ contract expected ‘imminently’. Good progress is also indicated in negotiations for the follow-on sustainment contract for M50 masks, as well as the anticipated multi-year contract for M53A1 mask and powered air system. The combination of these factors means Avon Protection’s results will be more heavily skewed towards the second half than in FY18, and slightly ahead of our previous expectations.
The performance should offset a difficult trading environment for the dairy business, milkrite | Interpuls. Global market conditions weakened in Q119 with lower milk prices adversely affecting customer confidence. Higher feed prices are also likely to pressurise customer margins in Q219. As a result, all lines of business are expected to weaken in H119 with a low single digit organic sales decline now expected. Management expects this to be reversed in H219, leaving the year as a whole flat on FY18 on a constant-currency basis. This compares to our prior expectations for operating profit growth of c 5%.