Avon Rubber loses momentum

What's new

• Strong first quarter

• Plays down threat from defence cuts

• Dairy demand volatile

Avon Rubber (AVON) had a strong first quarter and, at this early stage, is confident of hitting full-year targets. It stands a good chance, too, particularly if the US military keeps buying the group's M50 gas mask at the current rate. Avon's management also thinks they will, despite the threat of massive cuts to America's defence budget.

It delivered 130,000 pairs of M61 filters there during the quarter and is currently filling an order for 100,000 more. In fact, demand from the US forces and emergency services is "significantly stronger" than last year and there's enough work here to stay busy through the third quarter. In 2012, the Department of Defence (DoD) accounted for 43 per cent of group revenue, but Avon is still working through last year's record £14.7m contract from the Middle East, and will be in 2014, too. A new respirator for US correctional facilities – the PC50 – has just launched and others will follow soon. Avon's higher-margin, but smaller, dairy division is also doing well, especially the new Chinese operation. However, lower milk prices and higher feed costs mean demand for the rubber bits used on milking machines has been more volatile in the US and Europe.

Investec Securities says…

Sell. We do not anticipate changing forecasts at this stage and still expect adjusted pre-tax profit of £12.3m in 2013 and adjusted EPS of 28.3p. However, given current trading and good order cover in the protection and defence division, we believe forecast risk is to the upside. We fundamentally like the business but, given recent share price strength – the shares had risen to 446p and were trading on 15.5 times forward earnings when Investec made its call – and the high relative valuation, under our new rating structure we move to sell, despite raising our price target from 390p to 420p.

Arden Partners says…

Buy. The Avon growth story remains intact. Its two world-leading businesses continue to make good progress, broadening their markets and improving their organic growth potential. The strong balance sheet and improving cash generation also allow the group to supplement organic growth by acquisition. The shares have performed strongly since the group announced final results in November, but still aren't expensive given the strong market positions. We do not expect the rollout of the M50 mask to be significantly impacted by DoD budget cuts and expect further mask orders this year.

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