Avon Rubber: Regrouping In 2012 Ahead Of Growth Expectations

Avon Rubber’s prelims highlighted that the group has undergone a year of consolidation. This follows the rapid growth of the past few years, as focus turned to further enhancing operational efficiency and continuing R&D and business-development programmes to seed the next leg of growth from mid-2013 onwards. Despite the top-line pause, Avon (AVON.L) was able to grow operating profits by 4% and EPS by 7%, highlighting the benefits of the strategy to target higher-margin product areas and capturing greater value per sale. The group is well positioned to continue its progress with a stable core DoD business, a growing commercial offering and continued consistent growth from dairy.

Results show benefit of strategy
Avon’s prelims have shown that even in a year where the defence market has been challenging, revenues remained broadly stable at £106.6m (2011: £107.6m), with a 4% decline in P&D largely offset by a 6% increase in dairy. Operating profit increased by 4% to £11.6m (2011: £11.1m) with margin progress across both divisions, while PBT increased by 8% to £11.0m (2011: £10.2m) as the group benefitted from lower interest following reduced debt levels in the year, ahead of our expectations. EPS increased by 7% to 26.9p (2011: 25.2p), while net debt fell a further £3.1m to £8.7m.

Pause for breath ahead of new programmes
2012 was clearly a year of regrouping and consolidating the group’s position ahead of the next leg of growth, which is due to take effect from mid-2013 onwards. This is being seeded by the investment the group has been undertaking in both business development (with, for example, the opening of a Chinese dairy sales/distribution centre and a strengthened dairy management team) and in product development through Project Fusion in P&D and further development of the range of the Milkrite brand. Avon also announced a new NED, Richard Wood, former CEO of Genus, who will bring significant experience in targeting emerging dairy markets.

Valuation: Order book visibility should benefit rating
Given current uncertainty in the defence market, we feel the fact Avon has a strong order cover already in place for 2013 (nine months) should warrant a premium to peers. In addition, with dairy demonstrating consistent growth and a strategy to penetrate emerging markets as they industrialise production, the long-term value here is also substantial. Having rolled our valuation onto a CY13 basis, our sum-of-the-parts-based fair value is increased to 425p per share.

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