Avon’s H116 interims show the strategy has created a robust group that can deliver, even in weak market environments. With revenues up 5% to £66.3m, adjusted operating profit up 6% to £9.0m and adjusted PBT up 5% to £8.8m, both divisions made progress despite the challenge of low milk prices and the lack of an impact order. With an effective tax rate of just 1% (2015: 20%) reflecting anticipated geographic split of taxable profits for FY16, the finalisation of 2015 tax returns and a positive tax outcome of certain enquiries, basic EPS was up 29% to 28.7p (2015: 22.3p). Operating cash conversion was high at 163% of operating profit enabling net debt to decrease to £8.4m (£13.2m at end FY15), after £3.5m spent acquiring Argus in October 2015. The interim dividend (3.2p) continues its trend of increasing by 30% as anticipated. 

Despite a more challenging market environment, the group is better positioned to benefit from a normalisation of conditions through its sustained investment and development programme. This has translated into both increased operational flexibility to deliver either DoD or impact export orders in P&D, while improved market share across Dairy positions the group to benefit from a cyclical upswing with an even stronger mix than those seen in 2009 and 2013.

With results indicating that full-year expectations remain intact, we maintain our current PBT forecasts while our FY16 EPS forecast reflects the lower than expected tax rate, which is anticipated to revert to the norm in FY17. While there may be variations depending on the timing of impact orders, we believe that the accelerated growth opportunities remain into 2017 as a result of improved Dairy market share, the addition and synergies created by InterPuls and with a strong pipeline of both DoD and non-DoD orders in P&D. Our SOTP-derived fair value moves to 1,200p per share (from 1,065p) as a result of improved peer ratings.