Avon delivered FY19 modestly ahead of market expectations, as foreshadowed in the September trading update. New US mask systems contracts drove healthy organic growth for Avon Protection and, while milkrite | InterPuls sales were essentially flat, a progressive recovery in dairy markets allowed it to make up the shortfall experienced in Q119. Both divisions are expected to carry the positive momentum into FY20, with margins expected to improve in both divisions. The proposed record acquisition of 3M’s ballistic protection assets should substantially enhance earnings, and this has driven the re-rating in recent months.
Avon Protection had a strong year in the Military segment, with new mask systems contracts for the US DOD commencing deliveries in H219 and a $16.6m Rest of the World (RoW) mask systems contract also delivered in H219. These more than compensated for forecast declines in M50 mask systems volumes, as well as the slow start to the year for the Law Enforcement and Fire segments, in part caused by the protracted US government shutdown. Following a weak Q119 performance, dairy markets improved as the year progressed, benefiting milkrite| InterPuls. Adjusted PBT rose by 15.4% to £31.4m and fully diluted adjusted EPS rose by 18.7% to 90.9p, benefiting from £3.4m of one-off tax settlements worth 11.1p/share.
The company will face some headwinds in FY20, including expected M50 mask systems volume reductions for the US DOD, although at improved commercial pricing levels, as well as the decision to exit the subscale Fire SCBA market in the US, which will eliminate just under £7m of sales. A full year of new DOD mask systems deliveries at Avon Protection and a recovery in First Responders demand should drive moderate organic growth, with margins benefiting from better DOD contract pricing and the elimination of the lower-margin Fire SCBA sales. As dairy markets appear more supportive, entering FY20 with an improved opening order book, we expect a return to low single-digit organic growth and a recovery in margins towards historic levels. Our estimates have been increased modestly, but should be substantially enhanced once the acquisition completes.
A FY21 P/E of 21.5x reflects the anticipated financial enhancement from the $91m 3M ballistic protection acquisition. Once completed and consolidated, it should return the rating to a more normal premium to UK defence peers of c 17x.