Avon Rubber banking on further US armour demand

Even a global pandemic has been unable to halt Avon Rubber’s (AVON) march forward. The protective equipment specialist saw its adjusted operating profit surge by over a third in the year to 30 September, to £30m, boosted by the addition of 3M’s (US:MMM) ballistic helmets and armour business in January. On a statutory basis, operating profit did drop by two-fifths to £5.9m, weighed down by exceptional charges relating to acquisitions.

Having sold its dairy equipment business for £179m in September, the group is now free of the vagaries of animal feed and milk prices. The proceeds left it sitting on £93m of net cash at the end of September – up from £35m a year earlier – although this has come down following the $130m (£97m) purchase of helmet specialist Team Wendy last month. Broker Peel Hunt anticipates Team Wendy will help lift adjusted operating profit to £49m in 2021.  

There will also be the benefit of numerous contract wins over the past year, many of which are with its largest military customer, the US Department of Defense (DoD). This includes an exclusive three-year agreement worth up to $333m to supply the DoD with enhanced small arms protective body armour.

The group’s shares dipped by around 7 per cent following these numbers – likely in reaction to the statutory earnings decline – although they have still more than doubled in value since the start of the year. While a forward price/earnings ratio of 33 is rather pricey, investors are being offered healthy margins, a high return on capital employed and an increased dividend. The UK’s recent defence spending boost also means the post-Covid outlook for global military budgets may be better than feared. Buy.

Last IC View: Buy, 4,240p, 26 Nov 2020