- The protective equipment maker is guiding that revenue for the six months to 31 March will rise by two-fifths to $122m
- The contract issues are on their way to being resolved and new orders are flowing in
Protective equipment specialist Avon Rubber (AVON) was a standout player in the UK-listed defence sector in 2020. Its shares charged ahead while the likes of BAE Systems (BA) were weighed down by post-pandemic defence spending concerns.
But after reaching an all-time high of 4,625p in early December, Avon Rubber’s shares nosedived just over two weeks later after it announced delays to two of its US defence contracts, and revealed that a competitor was contesting the tender process of another.
As we look ahead to the group’s half-year numbers due out on 25 May it is worth noting that Avon Rubber has released two positive trading updates since then, although investor confidence has yet to fully recover – the shares remain some way off their peak at 3,328p.
In the most recent update from early April, Avon Rubber said that it had seen “ongoing positive momentum” in its second quarter, and on the back of double-digit growth in both its military and first responder businesses, the group guided that revenue for the six months to 31 March would jump by two-fifths year-on-year to $122m (£88m). This includes a $20m contribution from Team Wendy, the US helmet specialist acquired for $130m back in November.
Despite the aforementioned contract setbacks, Avon Rubber has continued to secure more orders, including $38m of initial orders for respiratory protection systems under its agreement with the NATO Support and Procurement Agency. Based on its $155m order book and expected order intake in the second half, the group is confident that it can meet full year expectations. Broker Panmure Gordon currently envisages an adjusted pre-tax profit of $47m, up from $36m a year earlier.
Regarding the contract issues, Avon Rubber is finalising the revised designs of its small arms protective inserts for the US Defense Logistics Agency, and is on schedule to complete “first article testing” – the process that examines whether goods meet certain specifications prior to production – in the second half of the year. If all goes well, deliveries are expected to begin in the second half of its 2022 financial year.
Meanwhile, the next generation head protection system contract with the US Army – for which the group had been selected as the sole source supplier – is being re-tendered, and Avon Rubber still believes that it offers the “optimal solution” to win.
So, while the risks have not fully abated, they do appear to be less severe than investors had initially feared. The group is continuing to pull in new orders, and with just $13m of net debt (excluding lease liabilities), it has sufficient balance sheet firepower to make further acquisitions. With the shares trading at 27 times consensus 2022 earnings, that doesn’t seem overly demanding for the quality and long-term growth on offer. Buy.
Last IC View: Buy, 3,140p, 29 Jan 2021
