Avon Rubber’s pre-close has confirmed that the group will meet market expectations and that performance in H217 has continued apace. With positive mix effects in Protection & Defence and continued strengthening in Dairy, we believe that the eventual revenue and margin mix may alter slightly but that our profit levels will be achieved. With CEO Paul McDonald signalling continued confidence into 2018 and with further medium-term product developments to come through in both divisions, we continue to view Avon as delivering in the short and medium term.
The pre-close statement showed that both the Protection & Defence (P&D) and Dairy divisions continued to progress positively. In P&D, 152,000 mask systems and 144,000 spare filter pairs are expected to be delivered, while the flexibility in the group means it will be able to fulfil the May 2017 order for 37,000 FM50 general purpose masks in the current financial year, with a consequential benefit to mix. Likewise, the supportive market environment in Dairy has allowed the positive growth trends seen in the division to continue into H2 with a particularly pleasing performance from InterPuls, which had previously been more affected by capital spend delays in the sector.
Avon has again highlighted its ability to deliver consistently, both in terms of profit and strong cash generation. With recent years’ investments also set to drive further growth over the coming years, we maintain our view that Avon has the market position, product portfolio and ambition to further accelerate its growth through organic and inorganic means. The confirmation of trading in line with expectations is positive in our view and demonstrates the robust nature of the group, even during the period of management change. We expect the new management team now in place to progressively stamp its own authority and signature on the group.
Following a period of consolidation, Avon Rubber is currently trading on just 13.3x FY18e EPS compared to its aerospace and defence peers, which are trading on an average of 17.1x. We believe that the confirmation of in-line trading at the preclose, in conjunction with the higher than average growth rates, should justify a return to premium ratings, as previously witnessed. With confidence signalled in the order pipeline and further growth prospects, which we will revisit alongside results, we continue to believe that Avon has further medium-term upside earnings potential.