Avon Rubber’s period-end announcement came with a kicker in terms of a strong final month performance in North American law enforcement but, more importantly, a significant late Middle East order. The result is a c 10% upgrade to our forecasts at operating profit level, highlighting the benefit of the group’s flexibility to switch between core DoD revenues and such “impact” orders at short notice. With core growth drivers intact and continued regional instability, additional prospects remain in the pipeline.
Avon’s year-end closing statement revealed that the group had delivered a strong performance in the final months. This was driven in part by strong trading in the North American law enforcement market, but principally by the receipt and rapid fulfillment of a late Middle East order for respirators. With the group’s flexible manufacturing approach, core DoD deliveries were able to be substituted for this higher-margin export order, leading to a c 10% increase in our adjusted operating profit and EPS forecasts for FY15.
At this stage we maintain our FY16 forecasts, which still call for 3% EPS growth over our upgraded FY15 figures. Such growth is driven by numerous drivers across both the Protection & Defence and Dairy divisions including core DoD deliveries, increasing fire penetration and ongoing expansion of the Cluster Exchange programme in Dairy. We believe this highlights the robust growth strategy, allowing impact orders such as the one revealed to provide the cream on top. With numerous high-value Middle East prospects being pursued and continued regional instability, management expects to see additional orders in FY16, although exact timing is difficult to predict. These would be incremental to our FY16 forecasts.
Following the 10% upgrade to our forecasts, further confidence in FY16 and associated improved net debt position, we are increasing our fair value from 900p to 1,010p/share. Given our conservative growth assumptions for FY16 and the array of potential incremental profit streams we have previously highlighted, not yet included in our forecasts, the potential exists for further upgrades. With a balance between long-term underpinning contracts, the flexibility to deliver urgent short-term requirements and a significant new product pipeline now coming to market, we believe Avon is structured to generate further shareholder value.