Avon turnaround helped by activist intervention

Usually, an active investor agitating for a sale in an underperforming business isn’t openly welcomed by management, but in the case of Avon Protection (AVON) the intervention has proved useful.

It is in the midst of a three-year turnaround sparked by a late 2021 share price implosion following the company’s admission that a body armour business it had bought from 3M for $91mn (£73mn) two years earlier had failed US military ballistic tests. 

Avon’s shares have lost more than 80 per cent of their value over the past three years, which led activist Ancora Alternatives’ call in June for a strategic review, saying there would be “multiple potential strategic acquirers” willing to pay more for the business than it is currently worth. 

Finance director Rich Cashin said this intervention made the turnaround job being led by him and chief executive Jos Sclater “slightly easier”.

“There was a risk, particularly in 150-year-old businesses, that a little bit of complacency can drift in,” he said. “And what that letter did was to prove to our troops internally that there is still work to do.”

That can clearly be seen in its full-year results. Adjusted operating profit was 9 per cent lower at $21.2mn, although a $24.6mn writedown in the carrying value of its head protection business, coupled with nearly $3mn of restructuring and transition costs, contributed to a statutory operating loss of £12.6mn. 

Cashin said the impairment was the result of it formally splitting the business into two units and apportioning the requisite goodwill to each. The helmets business was still carrying almost $30mn of goodwill from the 3M deal, which could no longer be justified given lower revenues and profitability.

Avon has cut central overheads, though, and is embarking on projects to improve margins and cash conversion, such as rationalising sites on both sides of the business. 

Cash conversion during the year fell to just 7 per cent, which management blamed on the timing of a one-off order for a Middle Eastern customer fulfilled at year-end, for which it expects to be paid this month. Net debt rose by $17mn to $85.4mn.

FactSet consensus forecasts are for earnings per share to pick up by nearly a quarter this financial year, but even on such a big gain Avon's shares trade at around 19 times earnings. More evidence of progress is required for even this rating to be justified. Hold.

Last IC view: Hold, 865p, 23 May 2023

AVON PROTECTION (AVON)
ORD PRICE:	770p	MARKET VALUE:	£233mn
TOUCH:	768-771p	12-MONTH HIGH:	1,250p	LOW: 582p
DIVIDEND YIELD:	3.1%	PE RATIO:	NA
NET ASSET VALUE:	527¢*	NET DEBT:	54%

	Year to 30 Sep	Turnover (£mn)	Pre-tax profit (£mn)	Earnings per share (p)	Dividend per share (p)
	2019	128	8.70	33.4	20.8
	Year to 30 Sep	Turnover ($mn)	Pre-tax profit ($mn)	Earnings per share (¢)	Dividend per share (¢)
	2020	214	2.20	12.5	34.5
	2021	248	-35.6	-79.9	44.9
	2022 **	264	6.0	18.8	44.9
	2023	244	-20.2	-54.7	29.6
	% change	-7	-	-	-34
	Ex-div:	08 Feb
	Payment:	08 Mar
	* includes intangible assets of $139mn, or460c a share. ** restated.  † £1 = $1.25 a share