Strong underlying progress
Avon Rubber's (AVON.LONDON) interims have clearly demonstrated the good underlying progress as the ongoing strategy to broaden the business and deliver margin-enhancing products flows through. Although some of this is masked by a currency headwind – particularly in Dairy – we are confident that Avon will meet our full-year expectations even if currency headwinds persist, effectively an underlying upgrade. Results are nonetheless likely to be H1 weighted as strong commercial revenues in Protection & Defence are replaced by DoD revenues in H2. With Avon’s own-brand Dairy strategy continuing and new products such as the Deltair fire apparatus having achieved approvals, we see further growth drivers remaining.
Interims highlight commercial benefits
The interims demonstrated the group’s strong commercial focus. Highlighting this was a 41% increase in adjusted operating profit to £8.2m (H113: £5.8m) on 3% revenue growth to £61.5m (H113: £59.6m) with a particularly strong performance from non-DoD weighted results in P&D. With finance costs down to £0.1m (H113: £0.2m), other net finance expenses flat and a lower tax charge at 24% (H113: 29%), EPS increased by 52% to 20.4p. Demonstrating the group’s confidence and excellent cash generation, the interim dividend was lifted by 30% to 1.87p/share.
Business becoming increasingly robust
Through the consistent strategy being pursued by the group, the business is becoming increasingly robust. With each set of results, we believe Avon is demonstrating how the business is progressing: getting the base DoD contract right; increasing commercial opportunities but less reliant on one or two large contracts; developing a broader product range; and delivering consistently growing profits, with margin enhancement and a rolling growth pipeline. With cash generation supporting the ongoing development of new market and products, we feel that growth is sustainable while delivering progressive dividends.
Valuation: Broadened business should be recognised
We believe the interims highlight that Avon is producing robust results demonstrating that it has decoupled from the traditional UK A&D space and is refocusing on more commercial elements in line with the strategy. We have broadly maintained our FY14 and FY15 forecasts, reflecting a strong H1 performance tempered by expected currency headwinds. Our sum-of-the-parts derived fair value is increased to 700p/share (was 682p) reflecting the inclusion of direct competitors MSA, Tyco and 3M into our valuation methodology.
To Read the Entire Report Please Click on the pdf File Below