Avon builds momentum as supply chain issues ease

Avon Rubber (AVON) registered an interim operating profit of $6.2m (£4.4m) against a $300,000 loss at the halfway mark in FY2020. Numbers, though broadly in line with consensus, point to an easing in the supply chain issues that stymied operational performance through the early part of the pandemic, with momentum building through the early part of 2021. Steps have also been taken to resolve the delays in product approval for its body armour programmes.

The Wiltshire-based group reported strong order intake, up 46.5 per cent, with the military segment recording a near one-third increase, coupled with a 28 per cent upswing from the first responder business. There was also an initial contribution of $18.4m from Team Wendy, a producer of safety helmets, which was integrated into the group in November. The order book closed at $157m, an increase of 15.8 per cent on the previous half-year, providing “excellent revenue visibility going into 2022 and beyond”.

The corporate transformation to a specialist provider of respiratory and ballistic protection equipment is all but complete. So, management has decided to change the group’s name to Avon Protection during the second half of the year. That shift is also reflected in the balance sheet. The acquisition of Team Wendy was largely responsible for the group moving into a net debt position (ex-lease liabilities) of $12.9m, against a net cash position of $148m at FY2020.

House broker Peel Hunt anticipates cash profit rising from $62.9m to $85.2m in FY2022, with the free cashflow yield increasing from 1.9 per cent to 3 per cent over the same period.

One imagines that the group will eventually have recourse to the undrawn $200m revolving credit facility, but with revenue expectations phased more to the second half, management expects cash conversion will improve significantly over the period. The structural drivers for growth in Avon’s main markets remain in place, so even though the shares are optimistically priced at 27 times adjusted earnings for FY2022, we believe the group will continue to build scale and cashflows. Buy.

Last IC view: Buy, 3,328p, 04 May 2021