Avon Rubber’s strong first half results allayed any concerns that the change in management team might have distracted this growth company from the task in hand. In fact, H117 numbers proved quite the opposite. Top-line growth has marched on apace and the CEO has shown ruthless focus in ensuring that R&D is concentrated on financially viable projects to stimulate further growth. A major new contract win announced yesterday should assuage any concerns about the M50 programme.
H117 results demonstrated that Avon Rubber is successfully delivering on its strategy of growing organically through good execution and strategic acquisitions. Revenue was up 7% organically, with flat margins despite slightly higher costs. EPS was flat year-on-year, but this is purely a function of an anomalously low tax charge in FY16 of 1%. The tax rate for FY17 is expected to normalise at 19%. Orders were up 9% y-o-y and we expect further contract wins in the second half
There is a subtle shift in mix of customers and products in Protection & Defence. The sole-source M50 respirator contract with the US Department of Defense (DoD) is due to end in 2019 and volumes were lower this year, as expected. The proportion of the division’s revenues from the DoD has therefore fallen from 56% in H116 to 50% in H117. Sales to EMEA and North America have increased, as, importantly, have sales of fire products following the acquisition of Argus. Avon is increasingly focused on more sophisticated mask systems, which have a higher selling price. In addition, the FY18 US defence budget, which was released yesterday, looks promising for Avon as it raises troop numbers. Dairy has benefited from a rebound in the milk price, which is leading to farmers investing in their facilities again. The Farm Services model is progressing well and the roll-out of the tag exchange has been brought forward to the second half of the year.
Avon Rubber is trading on 19.1x FY18e EPS compared to its aerospace and defence peers, which are trading on an average of 17.7x. However, we believe, this 8% premium is justified due to Avon’s higher levels of growth (6% EPS CAGR over the next four years) and significant exposure to US defence and commercial markets. The M50 contract announcement yesterday is tangible evidence of future growth potential in new markets.