Avon Rubber has built itself enviable market-leading positions in its two key markets, defence & protection and dairy. This gives the company a springboard from which to expand both geographically and through developing new products - and recent developments suggest momentum is in Avon's favour.
- Global-leading market positions
- Big commercial order in Middle East
- Defence order book expected to be up 38 per cent
- Opportunities for dairy business in Far East
- Delays to key contract
- Some revenues are 'lumpy'
Avon's biggest business provides respiratory protection equipment, essentially gas masks and associated filters, primarily to the US military. Protection and defence represents two-thirds of group revenues, but just 51 per cent of operating profits. The remaining revenues and profits come from supplying various bits of consumable equipment for milking machines. At present, most dairy industry sales are made in the US and Europe, but opening a sales and distribution facility in China promises action in this significant and fast-growing market. In 2011, dairy sales in the US totalled £20m, whereas Chinese sales were less than £1m.
Sales to the US Department of Defense underpin the protection and defence business, Sales of gas masks are backed up by recurring revenues from selling filters. Defence budget constraints are a risk, but in the first half of 2012 sales of respirators were in line with forecasts, up 30 per cent on the year. That said, delays in setting up an agreed contract meant that sales volumes of filter spares were down. But Avon is the sole supplier of filters on this contract until 2013 so it hopes to make up lost volumes.
To diversify its reliance on the US military, Avon also sells to other foreign military customers and, in May, announced its largest single commercial order from the Middle East, worth £14.7m for delivery in 2013 and 2014. Non-Department of Defense order intake this year has totalled £22.4m, compared with £5.4m last year.
It also sells to foreign military customers via the Department of Defense. These are often so-called 'impact' sales following some crisis, which usually means better profits. But this is also lumpy business. In its latest trading update, Avon said it expected full-year order intake in Protection and Defence to be 38 per cent ahead of last year, with firm orders stretching into 2013.
AVON RUBBER (AVON) | ||||
|---|---|---|---|---|
| ORD PRICE: | 300p | MARKET VALUE: | £92.1m | |
| TOUCH: | 290-300p | 12-MONTH HIGH/LOW: | 330p | 238p |
| DIVIDEND YIELD: | 1.3% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 81p | NET DEBT: | 39% | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 101 | 1.9 | -0.6 | nil |
| 2010 | 118 | 7.1 | 15.2 | 1.5 |
| 2011 | 108 | 10.2 | 25.2 | 3.0 |
| 2012* | 106 | 10.9 | 26.2 | 3.6 |
| 2013* | 120 | 13.0 | 30.6 | 4.0 |
| % change | +13 | +19 | +17 | +11 |
Normal market size: 800 Matched bargain trading Beta: 0.8 * WH Ireland forecasts | ||||
Avon is also investing in new product development through its Project Fusion initiative, which is expected to begin yielding results in the next 12 months.
In Dairy, Avon has a 60 per cent global market share in consumable milk liners for milking machines and increased revenues by 7 per cent in the first half. The introduction of new products is expected to continue pushing growth; indeed, a new vented liner introduced into the US has already grabbed 10 per cent market share. Avon sells both to equipment manufacturers and directly to farmers through its Milk-Rite brand.
As well as investing in the business, Avon's management has concentrated on running the existing operations efficiently so decent cash generation means that net debt has fallen from over £15m to below £10m in the past three-and-a-half years.
