Avon Rubber offers defensive growth

The ‘protection’ division accounted for almost three-quarters of the $179m (£146m) of revenue reported in 2019. Just over two-thirds of protection sales are to military customers, with the US Department of Defense (DoD) being the largest client. This provides a defensive end market. Revenue was previously underpinned by a 10-year contract to supply its M50 respiratory masks that ended in 2018. A ‘sustainment’ agreement at improved commercial pricing is expected this year, but in the meantime Avon has developed the new M69 and M53A1 mask systems, securing a combined $340m of long-term contracts. These more technologically advanced products boosted protection’s adjusted cash profit margin by 1.6 percentage points at constant currencies to 24.5 per cent in 2019.

The $91m acquisition of 3M’s (US:MMM) ballistic protection business, Ceradyne, has expanded Avon’s offering to ballistic helmets and body armour, and brought along more multi-year DoD contracts. It also enabled the group to secure a place on a $265m framework to supply next-generation body armour to the US army.

The purchase will push Avon from £48.3m of net cash into a modest net debt position in 2020. However, because of strong cash generation it previously guided to a return to net cash in 2021, although the coronavirus is likely to impact all past forecasts. The balance sheet remains in good shape for acquisitions and research and development.

Growth at the ‘milkrite-Interpuls’ dairy business is more variable as demand hinges on animal feed and milk prices. A weak first quarter saw 2019 sales stay flat at constant currencies at £50.9m. Despite a 1.3 percentage point decline, the adjusted cash profit margin was still a respectable 20.6 per cent. While orders were up 10 per cent in the first quarter of the 2020 financial year, the coronavirus outbreak could impede manufacturing operations in Italy.