Avon Protection registers top-line growth despite drop in US revenues

Two years ago, shares in Avon Protection (AVON) were changing hands at 4,490p apiece. But market valuations subsequently cratered due to US military contract delays, along with various supply chain issues and the failure of US army tests linked to the company’s Vital Torso Protection plates.

It’s impossible to know whether shareholders had questioned the rationale behind the 2020 sale of Avon’s profitable milkrite InterPuls dairy business, but at the time the group had secured several military and civil defence contracts. It’s understandable, therefore, why management decided to focus on that industry space even if it concentrated sector-specific risk in the process. Cut to the present day, and that exposure will become narrower still as the group plans to wind down its underperforming body armour business by the end of FY2023.

The market didn’t react favourably to news that the group’s statutory earnings remained in negative territory through FY2022, while adjusted operating profits fell by 61.4 per cent at constant currencies to $10.1mn (£8.56mn). Operational issues and an unfavourable product mix contributed to a 570 basis point reduction in the adjusted cash margin to 9.4 per cent. Regrettably, the drop in underlying profitability is only slightly less worrisome when the impact of the body armour business is taken on board.

Management can, however, point to some operational progress. Cash conversion in the year came in at 143 per cent, reflecting tighter working capital controls, while trade/receivables fell by a third. The group has also made material progress in its cost-cutting programme, achieving half the $15mn in savings targeted last December, with the remainder to come about through the closure of the body armour business.

The group registered top-line growth in the period despite a 21.2 per cent decline in revenues from the US Department of Defense. The dip in US revenue was mitigated by sales growth in the UK and international markets and it’s worth noting that the closing order book for the Pentagon was up by half from the previous year at $92.3mn. Management is also placing great store in the US army order for its ‘next-generation integrated head protection system’, in addition to personal protection contracts with the Nato Support and Procurement Agency. Avon reported a closing order book of $151mn, representing a 7.8 per cent increase over the same point in 2021.

Consensus estimates point to a forward rating of 14 times adjusted earnings, but investor sentiment is unlikely to improve until the planned cost savings have a positive impact on underlying profitability. Hold.

Last IC View: Hold, 1,004, 24 May 2022