Avon provides scant protection for investors

Even in hindsight, Avon Protection’s (AVON) decision in 2020 to offload its milkrite business – a provider of rubber equipment used in dairy production – for £180mn makes some sense. The company was keen to focus on providing protective equipment to the military and emergency services operators, and there was no real crossover between the divisions.

The problem for investors has been that the exercise of this plan has been awful. The £75mn acquisition of 3M’s ballistic protection business was clearly a mistake, given the subsequent failure of the body armour it made in tests by the US military.

The body armour business continues to lose money as it is being wound down (it declared an operating loss of $5.5mn on revenue of $14.6mn in the first half) but the company expects to complete its remaining obligations to the division’s customers by its September year-end.

However, Avon’s half-year results show that other parts of the business are also underperforming. Revenue fell by 4.6 per cent to $116.2mn. Deliveries of helmets to the US Department of Defense have been slower than expected and softer demand for masks means respiratory equipment sales are also lower.

Meanwhile, a need to build inventory meant it suffered a cash outflow from operations, and when continued dividend payments and higher financing costs are added, net debt rose by 38 per cent to $71.8mn. The company maintained its interim dividend but has put its dividend policy under review and is not doing any more share buybacks.

Perhaps it should have stuck with the cows. In the three years prior to the milkrite sale, the company’s operating profit averaged £18.9mn. It has lost money in three of the four years since, and the outlook for this year isn’t looking great, either.

Although new chief executive Jos Sclater’s team has made progress in cutting costs, revenue is set to fall by 9 per cent year on year.

Avon’s shares fell by 11 per cent in early trading and have lost 80 per cent of their value since their all-time high just under three years ago.

House broker Peel Hunt kept its buy recommendation unchanged, arguing that although the timing of orders is tough to call, the new management has delivered “tangible improvements”. That may be so, but until expected orders turn into revenue the risks remain to the downside. And even after their slump, Avon’s shares trade at about 18 times forecast earnings. Given the company's recent track record, this doesn't look like enough of a bargain to change our hold recommendation.

Last IC View: Hold, 115p, 22 Nov 2022