Avon finding value in more advanced products

Avon Rubber designs, develops and manufactures rubber-based products. The bulk of its work – 70 per cent of sales and 76 per cent of operating profit – is respiratory protection systems such as gas masks aimed at the defence, law enforcement and fire sectors, principally in the UK and US. Its other business sells milking equipment to the global dairy industry.

The company is using its strong balance sheet and established market position to develop higher-margin products and branch into new areas. Research and development spending last year rose 17 per cent to £9.7m, accounting for 5.9 per cent of sales, a level of funding that is expected to be maintained over the medium term. The group aims to make substantial investments in areas that are “most relevant to our customers and [offer] the best commercial outcomes”, rather than spreading investments thinly across a wide range of applications.

This means much more focus on protection. The group has built a close relationship with the US Department of Defence over the course of its decade-long contract as sole supplier for the M50 mask system. Avon has been working on new products for the US military, which should secure it higher margin and a better spread of revenue between the masks its sells and aftermarket services, accessories and spares.

At the start of the calendar year, management announced a $92.7m (£70.4m) contract with the US Department of Defense to supply one of its new products, the M69 Aircrew mask. The first order, worth $17.8m for 7,000 systems and related accessories, was made in early February. Further orders are expected related to a follow-on contract for its M50 masks and a new M53A1 mask and air powered system. 

The company’s impressive cash generative along with proceeds from the sale of a non-core hovercraft skirt business pushed net cash up from £21.8m to £46.5m last year. The company also has a £31m pension deficit. Management wants to use the cash pile to bolster growth with acquisitions to expand product ranges or broaden geographic range. Management says it would not take net debt beyond two times cash profits. Given the limited benefit of holding such cash in a low-interest rate environment, the right deal could provide a substantial boost.

The most recent acquisition was the $2.1m purchase a calf-nurser product line from animal feed group Merrick’s last June. However, a fall in milk prices is expected to lead to a subdued performance from the dairy business overall this year.