Avon Rubber has delivered a solid set of results in a market that had several challenges, highlighting the strong position the group has created over the past eight years. With several FY17 growth tailwinds, we upgrade our FY17 PBT forecasts by 15%, while identifying further upside opportunities across both divisions. From this robust base, and with the previously announced departure of CFO Andrew Lewis, the group now moves into the next stage of development, with a further acceleration of growth the core remit of CEO Rob Rennie through both a continuation of the organic growth and a likely step-up in acquisition spend.
Avon’s FY16 results demonstrated the group’s robust base, which can deliver even in a more challenging market environment. Revenues were up 6% driven by currency, which also contributed £1.4m to operating profit. This, combined with a continued focus on driving higher-margin activities and a clear focus on cost efficiency in FY16, drove an 8% improvement in operating profit and a 13% increase in EBITDA. With net financing costs broadly flat and the receipt of a £0.9m tax credit during the year, EPS advanced by 33% to 74.2p. Continued strong cash conversion allowed debt reduction following recent acquisitions to leave the group with net cash of £2.0m at year end, and the dividend was raised by a further 30%.
While FY16 may have had little support from market dynamics, several key factors support a 15% upgrade to our FY17 PBT figures: 1) currency – with a 17c swing at current £/US$ FX rates equating to a £13m revenue increase/£2m uplift to PBT; 2) Dairy – a market rebound, supported by increased prices as witnessed in the final quarter, is likely to support an incremental £4.5m revenue increase/£2m PBT above our original forecasts; and 3) the receipt of at least one impact order, several of which have been pursued throughout FY16, is expected during FY17.
Our implied fair value of 1,330p/share equates to an FY17e P/E on current forecasts of 20.1x or an EV/sales multiple of 2.4x. With successful integration of recent acquisitions, Avon also has organic growth options that could deliver £48m incremental revenue and £13m PBT in FY17, supporting a 2,000p/share upside case. With a strong balance sheet and estimated firepower of up to £100m to support further M&A, we wait to see the strategy CEO Rob Rennie will pursue to add incremental technologies and reach to the group to accelerate growth further.