Avon Rubber’s Capital Markets Day highlighted the strength and depth of its product portfolio. Investment in both divisions has ensured that the company is able to address strong growth trends in its end-markets with attractive solutions. Avon Protection has received US regulatory approval for its Powered Air Purifying Respirator range, which should see further orders. Meanwhile, milkrite I InterPuls is offering solutions for productivity improvements to a dairy market increasingly open to technology.
Avon Protection has developed its product range to not only significantly widen its addressable market but also to increase the sophistication and unit price point of its products. Avon may be selling the same number of units as before to a customer, but the higher unit contribution has a positive multiplier effect. Avon aims to introduce customers to its products and presents them with the opportunity to move up the product suite as demands arise. This also involves working closely with some customers to develop the best solution, which was the case with the Powered Air Purifying Respirator range. After recent regulatory approval, the first US customer for the range is a large federal law enforcement agency, which was involved in the development of the technology. Avon anticipates further orders from US customers in the near future.
milkrite I InterPuls provides solutions to farmers to address the multiple issues of milk quality, environmental impact, farm efficiency and profitability. The market backdrop is supportive, with rising global consumption of dairy products. As little as 15 years ago, farmers had to be convinced of the benefits of technology, whereas today they are asking what solutions are on offer. The division is scheduled to spend £1.5m on product development this year to ensure they are at the forefront of this evolution.
Our DCF valuation on a calculated WACC of 8.0% currently delivers a value of 1,297p. On 16.2x 2018e P/E, the stock is trading at a discount to its UK aerospace and defence peer group. However, the company’s growth strategy, higher-thanindustry-average profitability and building order book afford Avon Rubber the opportunity to deliver further medium-term upside earnings potential and hence justify a valuation premium, in our view.