Avon Rubber has now released their final results for the year ended 2019.
Revenues increased when compared to last year due to a £12.7M growth in protection and defence revenue and a £1.1M increase in dairy revenue. Depreciation fell by £500K but amortisation was up £700K and other cost of sales increased by £6.7M to give a gross profit £6.9M higher. Admin costs increased by £2.8M and there were a number of one-off costs including £3.5M on pension scheme past service costs, £2.9M acquisition costs, £5.4M costs relating to the exit of the Fire SCBA market and a £1.1M property impairment, although there was no £900K restructuring cost this year. All of this meant that the operating profit fell by £8.4M. Finance costs reduced somewhat and the tax charge was £2.4M lower which meant that the profit for the year was £14.3M, a decline of £7.1M year on year.
Total assets increased by £7.6M when compared to the end point of last year, driven by an £11.2M increase in trade receivables, a £4.3M growth in deferred tax assets and a £1.8M increase in cash, partially offset by a £3.5M decline in acquired intangibles, a £2.4M fall in development expenditure, a £2.3M decrease in inventories and a £1.2M fall in freehold property. Total liabilities also increased during the year as a £2.4M decline in trade payables, a £2M fall in current tax liabilities, a £1.5M decrease in deferred tax liabilities and a £1.3M decrease in accruals was more than offset by a £12.5M increase in the pension obligation. The end result was a net tangible asset level of £51.1M, a growth of £7.8M year on year.
Before movements in working capital, cash profits increased by £1.3M to £37M. There was a cash outflow from working capital and after tax payments increased by £1.1M the net cash from operations was £15.8M, a decline of £15.6M year on year. The group spent £3.9M on property, plant and equipment and £4M on development costs to give a free cash flow of £7.9M. This covered the dividends of £5.4M and own share purchases of £1.3M so the cash flow for the year was £1.2M and the cash level at the year-end hit £48.4M.
The operating profit in the protection business was £26.2M, a growth of £4.7M year on year. There was a 26% growth in military revenue offsetting a 27% decrease in law enforcement and a 5% decline in fire. There was good growth across the military business with both the DOD and ROW customers. The award of two significant long-term contracts with the DOD for the M69 aircrew mask and the M53A1 mask and powered air system, which have a combined contract value of $340M, confirm the business as the sole source provider of general purpose masks, tactical masks, powered air systems and tactical SCBAs across the DOD.
The M53A1 framework contract, which also covers additional products, including the ST54 self-contained breathing apparatus, has a maximum value of $246M and a minimum five year duration. This framework is accessible to a number of different and new customers within the DOD, including all four military service branches and other national and federal agencies. They received the first order under the contract earlier in the year, worth $20.2M, which they have partially completed during the year, and expect further orders during 2020.
The M69 sole source contract to supply the DOD with the M69 Joint Service Aircrew Mask for strategic aircraft extends the group’s portfolio reach into the aviation sector for the first time and has a maximum value of $93M and a minimum five year duration. As with the M53A1 they received their first order under the contract worth $17.8M earlier in the year and they partially completed the first deliveries this year.
These contract awards mark the transition away from the historic focus on the M50 mask system. Notwithstanding this, the M50 mask system remains an important part of the portfolio and positive discussions regarding the future requirements of the DOD are ongoing and they expect to have a contract award in 2020. In addition they have a visible pipeline of ROW military opportunities and are in active dialogue with a broad range of customers who are looking to upgrade their capability to the FM50 mask system.
The group re-established their relationship with the UK MOD when they won the contract last year to supply their GSR mask. They have been preparing the tooling and processes for the full manufacturing requirements and completed customer acceptance testing. They expect the first orders and deliveries to follow in early 2020. Through those activities they have been able to demonstrate to the MOD their focus on quality and technical expertise, and as a result, they see further opportunities to deepen their relationship with the MOD, leveraging from their wider product portfolio.
They launched their MCM100 deep water rebreather in 2018 and completed the first large order from the Norwegian military during the year. The MCM100 has opened up a significant number of new opportunities with various militaries. They have had an active year of dive trials and supplied a number of evaluation units, which has enabled them to demonstrate their technology.
During the year the strong momentum in the law enforcement business was interrupted by the partial shutdown of the US government at the start of 2019. The shutdown had a significant impact during the year and whilst purchasing activities returned to normal in the second half, affected customers were unable to accelerate their procurement processes to fully mitigate the delays. Despite this, the law enforcement community is still showing a strong demand for their protection products as the elevated environment of threats remains high on the agenda.
They continue to see good market penetration with US and ROW law enforcement customers, where they have been able to demonstrate the benefits of their portfolio and modular product range to meet the diverse needs of a broader section of customers. They expect to continue to grow their market share in all of their key markets which should support a return to growth in 2020.
Given the breadth of their personal protection offering following the 3M acquisition, the group have reviewed their participation in the Fire SCBA market. The Fire market remains highly competitive with a fragmented customer base where they have a small market position and compete against much larger players which means they generate margins that are below their strategy targets. They have therefore taken the decision to move away from the market.
They will continue to stay committed to the Argus thermal imaging camera technology which contributes to their profits. During the year they increased volumes across their full range of products from the premium MiTIC S to the more cost effective MITIC E solution.
The operating profit in the Dairy business was £7.5M, a decline of £500K compared to last year. This was due to difficult market dynamics, particularly in North America during the first half of the year. Their customers continue to see the benefit of accessing their product range on a lease hire basis but the growth from farms taking up Farm Services was offset by closures of smaller farms. With stabilising market conditions they expect the division to return to growth in 2020.
On a constant currency basis, Interface grew revenue by 0.8% but there were reductions in PCI revenue of 3.8% and Farm Services of 1.6%. The growth of Interface was driven by a stronger performance in Europe and Asia Pacific in the second half of the year. North American revenues declined by 1.5% reflecting the challenging market conditions over the year with increased farm closures and consolidation in the sector.
The sales of the PCI range were most affected by the difficult trading conditions as farmers sought to delay investment until more certainty returned to the market. The stabilising conditions from spring meant that farmers were more confident to invest in farm efficiency again, highlighted by a 5.5% increase in order intake. The strong closing order book of £1.4M gives the board confidence in the stronger performance of the business in 2020.
The challenging market conditions in North America impacted Farm Services and interrupted the growth of the lease model with the addition of new farms offsetting farm closures and consolidations. Reflecting the impact of the changing market dynamics, the constant currency decline in North America was 5.3%, partially offset by a 6% growth in Europe. The consolidation seen in the North American dairy market in 2019 will fundamentally support the return to growth in Farm Services as the larger dairies are most focused on labour and farm efficiency and animal welfare.
The development expenditure in the year has predominantly focused on Avon Protection with significant investment in the UK GSR, MC M100 and next gen hood programmes. Development expenditure for Milrite included the compact milk meter to address the market for smaller milk producing animals.
The group signed an agreement to acquire 3M’s ballistic protection business and the rights to the Ceradyne brand in August for an initial cash consideration of £75M with a further potential contingent consideration of £21M. They expect to complete the acquisition in the first half of 2020 once US regulatory approvals have been received.
There were a number of one-off costs during the period. There was £3.5M relating to the high court judgement on pension equalisation; £2.9M of acquisition costs relating to the 3M acquisition. At the year-end the decision was taken to move away from their participation in the Fire self contained breathing apparatus market, resulting in one-off exit costs of £5.4M including a £3.8M impairment of development costs, inventory write-downs of £1.4M and receivable write-offs of £200K. The restructuring of the dairy business created at vacant property at the Italian operation. Changes in the local economy mean it was appropriate to write off the carrying value of this property by £1.1M.
Going forward the group had an opening order book of £40.4M. A full year of revenue and follow on orders is expected for the M53A1 and M69 contracts. The M50 sustainment contract negotiations are progressing with the DOD and an award is expected in 2020. There is a strong pipeline of ROW opportunities with first orders and deliveries of UK GSR expected in early 2020. Law Enforcement is expected to return to growth with positive momentum entering 2020. There are stabilising dairy market conditions that support improved farmer confidence and the dairy division is expected to grow in 2020. The group is expected to return to a net cash position by 2021.
At the current share price the shares are trading on PE ratio of 53.2 which falls to 26.5 on next year’s forecast. After a 30% increase in the dividend, the shares are yielding 0.8% which increases to 1.1% on next year’s forecast. At the year-end the group had net cash of £48.3M compared to £46.5M at the end of last year.
Overall then this has been a decent underlying year beset with some one-off issues. Profits fell due to the pension equalisation, exit from the fire market and acquisition costs. Net assets increased but the operating cash flow declined due to working capital movements. Cash profits grew, however, and a decent amount of free cash was still produced. The military market is doing well as new mask contracts take over from the older ones. Law enforcement declined due to the US government shutdown and the dairy market suffered from difficult conditions. These issues seem to have resolved as the group moves into this year, however. The shares are expensive with a forward PE of 26.5 and yield of 1.1% but we are paying for quality here in my opinion.
On the 30th January the group released a trading update. They saw a positive start to 2020 with continued strong order intake in both businesses. The board therefore remains confident of achieving its expectations for the current year.
Avon Protection saw a solid start to the year with order intake up 12% in Q1. Strong order intake in the military business has more than offset the impact of their exit from the fire market. They expect to receive further follow on orders in Q2 from the US DOD under the M69 and M53A1 mask and powered air systems contracts. They also see a strong pipeline of ROW and first responder opportunities to further broaden their customer base across their product portfolio.
The acquired ballistic protection business performed in line with expectations and the board remain confident of it achieving their expectations for 2020.
Global dairy market conditions have remained positive in Q1. Improving milk prices, together with stable feed prices and production volumes have led to improved farmer confidence, resulting in orders received in Q1 being up 10%. This has supported strong trading for Miltrite InterPuls across all three lines of business. They expect global dairy market conditions to remain positive in the near term.