Doobz, no closure yet. I forget the timescale for wind down. |
 Recent good article in the Chronic Investor -
Could Avon Protection go the way of Ultra Electronics?
A new US contract could provide reassurance over the relationship with the US Department of Defense
Could Avon Protection go the way of Ultra Electronics?
February 10, 2022
By Taking Stock
Midway through 2020, Avon Protection (AVON) hived off its Milkrite InterPuls business to DeLaval Holding for around £180mn on a cash and debt-free basis. Bosses had determined that a move away from the production of artificial ruminant teats would enable the group to become further entrenched in military and first responder markets, aided by an intensified focus on respiratory and ballistic protection. They may have had a point. Military contracts are generally predictable, multi-year affairs, providing greater clarity on sales and cash flows. Higher-tech kit usually generates decent margins and the US military doesn’t usually scrimp on protective gear for its service personnel.
The Wiltshire-based group has been trading for 137 years, ironically coming into existence in the same year that Gottlieb Daimler was granted a German patent for his single-cylinder water-cooled engine design, and King Leopold II of Belgium established the Congo Free State as a personal possession, both of which were highly significant developments for the rubber industry. At various points along the way, Avon has manufactured everything from conveyor belts to diving suits, so the move could be viewed as part of an evolutionary process – companies have always repurposed their manufacturing capabilities to suit end-markets. And you could even say that Avon’s central input over the years had provided a degree of flexibility.
Avon has determined that its growth prospects are best served by the military alone, but in the age of specialisms it’s sometimes worth remembering that having different products can spread risk between markets. At the end of last year, the board took the decision to shut down the body armour business following news that its Vital Torso Protection plates had failed initial US Army tests.
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The closure fed through to a $46.8mn (£35.3mn) impairment in its full-year 2021 accounts, and a consequent net earnings loss, so the shares duly headed south. You can now pick them up at about a third of their 12-month high of 3,660p recorded in April 2021. Nonetheless, it would be dishonest to suggest that the decision to streamline the business model was wholly ill-conceived, especially given that it came on the heels of two new contracts from the US Department of Defense worth in the region of $66mn.
The Milkrite InterPuls arm had generated 28 per cent of sales in the group’s half-year results published shortly before the decision to divest. It also accounted for the entire statutory half-year operating profit of £3m, after the Protection segment was lumbered with increased depreciation and amortisation charges. Perhaps the rationale may become clearer when you consider that the Protection order backlog was 22 times larger than that of the dairy-supply business, although that is largely attributable to the nature of the typical contractual arrangements for both segments.
Whatever the reasoning behind the move, it has been a sobering experience for investors. But respite is at hand – or at least partial respite. Avon Protection has announced the award of a contract to supply the US Defense Logistics Agency with the second-generation Advanced Combat Helmet. It is worth a maximum of $204mn over a five-year period, being a one-year base period with a maximum value of $46mn plus four further one-year extension options. As mentioned, the typical long-dated nature of these deals is certainly a plus point, and analysts at Jefferies believe that it “will also (hopefully) put to bed any concerns that investors will have surrounding Avon's relationship with the US Department of Defense”. The broker does not expect any change to consensus, but the contract “helps to underpin longer-term forecasts”.
If anything, the failure of the Vital Torso Protection plates could highlight the dangers of being a small fish in a very capital-intensive pond. It is not as if the likes of BAE Systems (BA.) and Lockheed Martin (US: LMT) don’t botch defence contracts from time to time. Yet they are better able to wear set-backs simply due to their scale – not too many eggs in one basket, to mix in another unwanted metaphor.
Jefferies may be right about investor perceptions over Avon’s relationship with the Pentagon, but that could open it up to the attentions of bigger pond dwellers. The recent experience of Ultra Electronics (ULE) and, indeed, Cobham before it, show that UK contractors remain on the menu. Avon’s share price cratered once doubts over body armour business emerged, but it closed out FY 2021 with net cash (ex-lease liabilities) of $26.8mn and a residual order book of $117mn. You have got to imagine that it’s in play. |
Thanks P1nkfish, am I right in saying they've now closed that failed acquisition down? |
Supply issues & test failures in body armour meaning they did a poor acquisition. That's enough to take air out of the ballon. |
Hi Avon holders, just looking at these. maybe a more clued up holder can tell me... Is the general rough time they've had largely due to Covid and supply chain issues. Potentially looking to build a position and trying to add up the recovery story for them. Looks well timed at lows with decent director buys and conflicts
Thanks |
Products in demand! Sad but true. |
When a director buys shares, it is definitely positive. |
I would add that with the conflict with Russia going on with a possibility of worsening with time, AVON products will certainly be in great demand from NATO and other European armies and also from countries around the conflict zone. This is probably the best time and entry point to start a position or accumulate AVON and hold for 1/2 years - if not taken over by then. Just for a mere $635 million bid, we get £20+ a share ... |
A takeover could easily happen one morning at 7.00am.
Avon is a cash rich easy target with very special products that will complement any civil or military safety manufacturing big company. |
Was a good response from the FD to be fair to him. I really rate this companies chances moving fwd. my share in them as smashed but my gut says it will all work out ok. |
Conwy Certainly being cash rich is always an attractive proposition for a bidder but there is so much more than that.I agree with Jeffian the share buyback does not alway lead to shareholder gain but what I take from the response is the board are not in hiding and genuinely believe in the company and the work they doValue will be gained with more wins and better resultsI would like to see. Steady climb to levels seen 1 year ago |
Sounds to me like they are positioning for a merger or sale of themselves. |
What the shareholder feels is down to the shareholder. Fact is the EPS will improve over time as a consequence. The multiple placed on that EPS is down to the growth of the company and P/E that is likely to be compressed across the board for a while as market flows slow and liquidity is reduced. |
" All things be equal this increases the value of each share. "
And therein lies the fallacy. All things are not equal. The value of each share in the shareholder's hands is not the underlying NAV or any other theoretical basis, but what Mr. Market will give him.
I can see I'm in a minority on this but if the shares stay where they are or go down whilst the company spends £m's of real cash, will all shareholders feel that they have had "cash returned" to them? |
So the rules are clear a company can not buy back shares and manipulate the price and restrictions are in place to prevent this.I am impressed with the level and standard of communication with share holders who ask sensible balanced questions |
This is the reply I received from the CFO today. Which is full of detail and hope is helpsThank you for your follow up questions regarding the share buy-back, which I have attempted to answer as follows. Given our immediate priorities of closing the armor business and reshaping the group around our core respiratory and head protection businesses, we have announced that we do not intend to initiate any major merger and acquisition activity in 2022. Given the strength and cash generative nature of the core business and our strong balance sheet we have concluded that a share buyback is a good use of the cash we expect the business to generate whilst M&A is off the agenda. The principle behind a share buy-back is that it reduces the number of shares in issue increasing the proportion of the business owned by each share thereby resulting in the earnings attributable to each remaining share increasing. All things be equal this increases the value of each share. Of course, on a given day or short period of time, there are many other influences on the share price, such as other news relating to the company, other similar companies, and the economy in general, so it's not possible to disaggregate all those influences. A buy-back also has the secondary benefit of allowing holders who are looking to exit, a liquid market to sell their shares into and thus decrease any "overhang" of stock which would depress the share price in the short term. Based on the current share price, the $25 million share buy-back programme should improve our EPS by c. 4 5%, which in theory should convert through into a share price rise of the same level. Given that in will take c.6 months to complete the share buyback the 4-5% increase will be achieved over the same c. 6 month period. As such the SBB will not result in a dramatic discernible move in share price in the short term or on any particular day. I should highlight that U.K. listing rules limit the number of shares we can by to 25% of the daily trading and put a ceiling on the price that can be paid of 105% of the average price over the last 5 days. It is these rules that are determining the level of shares bought on a daily basis and which drive the estimated 6 month period to complete the programme. More generally, the driver for delivering shareholder value is for us to continue to grow the business, with the contract win of the Advanced Combat Helmets for the US military, announced last week, an excellent step forward. As we continue to deliver growth across our portfolio and demonstrate we can deliver on city expectations for the core business, I expect this to be the main driver increasing share price. |
One would have thought with all this Russian sabre rattling that military suppliers stocks would benefit |
Ceiling at 1206p. Break through and a chance of a run imho. |
Cost willbe be a fraction of what plebs pay. |
I don't know which is there broker |
Good question. Aren’t they doing this through Jeffries the broker? |
Here is a question for all you clever people.Avon is in the middle of a buy back program and yesterday they reported the following purchasesDate of purchase: 15 February 2022 Aggregate number of shares purchased: 15,576 Lowest price paid per share: 1128.00 Highest price paid per share: 1154.00 Average price paid per share: 1143.60 It looks like they are trying to buy as many shares as they can when ever the price drops and did this Via a bot 200 times yesterday with some of these trades being for a few sharesMy question what is the dealing cost of each transaction if it is 10 pounds then it's thousands per day in dealing costs or do you pay a set fee to the broker which covers all transactions.If I was trying to move the price higher this would be the opposite to what I would do.So it seems to me we are paying to improve EPS not enhance share holder value via share price gain |
Totally agree…it will get bought out so averaging down with this is best option right now.! |
Theres no quick fix for the share price here outside of a sale of the company. AVON will be in purgatory for a while so a very good time to pick up shares cheaper than they would be.
The market might forgive but it wont forget for a while (6-36 months) and its end of the tax year soon too. I dont expect much change until after the summer, just imho. May be a reaction 30 days after end of tax year once losses are all booked etc??? |
Or if the price goes down less than it otherwise would. |
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