Avon Rubber’s H118 report demonstrates the strength of the group’s new strategy in action. Success is evident in the enhanced product portfolio and order progression is building visibility and supporting medium-term growth. Given the group’s exposure to the US, the FX headwind was visible in H118. Management maintained its guidance for FY18 underpinned by end market opportunities and new product deliveries.
H118 orders of £88.3m (H117 £90.8m) were 5% ahead on a constant currency basis while reported H118 revenue of £77.7m (H117 £78.9m) was 5.9% on the same basis. This gives a book to bill of 1.14x. Reported PBT was £9.4m (H117 £8.9m), while adjusted EPS of 32.8p (H117 28.6p) represented a 33.7% lift at constant currency. The interim dividend of 5.34p (H117 4.11p) indicated a 30% uplift. Cash generation remains good with 123.9% EBITDA conversion and, including the £6.6m proceeds from the Avon Engineered Fabrications (AEF) divestment, the net cash position increased to £39.1m (FY17 £24.7m).
Avon introduced a threefold strategy in FY17 with the aim of delivering long-term, sustainable growth from the core business, product development and selective M&A. Further progress was visible in H118 especially with new product development and orders. The approach is to grow the core, add selective product development and make value-enhancing acquisitions to accelerate growth. While innovation is key to the business, the overall level of investment will be lower in total but more focused in nature. End market trends are supportive to both divisions and Avon has an attractive portfolio to leverage from this. The group has a successful acquisition history and will continue to be disciplined over future deals.
Taking an average of our DCF and our sum-of-the-parts valuations gives a fair value price of 1,450p, which would imply a FY18e P/E of 19.5x. The stock is currently trading at a premium to its UK aerospace and defence peer group. We feel that this premium is justified given its exposure to the growing US defence budget environment and the heightened chemical, biological, radiological and nuclear (CBRN) threat in the UK and overseas. In addition, the stock should reflect the higher valuation of its dairy peers. Overall, the higher than average margin performance and future growth reflected in our forecasts support a valuation premium.