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Avon needs to make up lost ground

Revenue flat on delayed US defence spending
Avon needs to make up lost ground
  • One-off costs of $10.8mn tip company into loss
  • Order book has dropped by more than one-third

Avon Protection’s (AVON) awful recent run doesn’t appear to be ending any time soon. The company, which confirmed plans to wind down its body armour business in December after some of its plates failed US Army tests, said chief executive Paul McDonald will depart at the end of its current financial year.

Results for the six months to 2 April were as bad as expected, with profits weighed down by $10.8mn (£8mn) of one-off charges – including impairment charges of $3.8mn, restructuring costs of $1.4mn and $800,000 of costs related to an abandoned attempt to sell the body armour unit.

Revenues were flat at $122mn and new orders received dropped by around a third to $114mn, with the company blaming slower procurement from the US Department of Defense due to delays in approving the federal budget.

Profit margins were also hit by supply chain challenges and net debt increased by more than $27mn to $83.3mn.

The company is implementing $15mn of cost cuts. Half of these will fall on the body armour business, which is expected to take about 18 months to wind down. The other half will affect its ongoing business, but many of these have already been achieved, the company said.

Avon Protection’s shares enjoyed a brief rally following Russia’s invasion of Ukraine but a downbeat trading update last month and the publication of its half-year numbers snuffed out any hopes of a sustained revival. The shares fell 15 per cent, bringing the 12-month decline to almost 70 per cent.

The company expects improved margins in the second half and says a more militarised border between Russia and NATO states will drive longer-term demand for protective equipment. It is the sole framework contractor for respiratory equipment to NATO’s Support and Procurement Agency.

This, and likely increases in orders from the US mean there “are reasons to be optimistic” about Avon’s future, analysts from Jefferies argued, despite the likelihood of consensus earnings downgrades. Peel Hunt cut its adjusted earnings per share target for 2022 by 40 per cent to 25.7p, but left expectations for the next two years and its target price of 1,500p unchanged.

A lot needs to go right for this to be hit, though, and given that the current share price equates to about 40 times forward earnings there’s no compelling argument to be made for buying them. Hold.

Last IC View: Hold, 920p, 15 Dec 2021

AVON PROTECTION (AVON)  
ORD PRICE:1,004pMARKET VALUE:£304mn
TOUCH:1,000-1,005p12-MONTH HIGH:3,284pLOW: 860p
DIVIDEND YIELD:3.6%PE RATIO:na
NET ASSET VALUE:667¢*NET DEBT:41%
Half-year to 02 AprTurnover ($mn)Pre-tax profit ($mn)Earnings per share (¢)Dividend per share (¢)
20211220.401.6014.3
2022122-13.634.914.3
% change-0.1-+2,081-
Ex-div:4 Aug   
Payment:2 Sep   
*Includes intangible assets of $176mn, or 581¢ a share. £1 = $1.25