This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest. Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required. Well the rain has killed any hope of doing anything meaningful outside today so time for a weekend review again this week. There’s a fabulous feeling about the market currently imo, although many may not feel it. When investors/traders sell off just because they cannot take anymore, when they just want ‘pain relief’ or 5% guaranteed from gilts looks attractive compared to fluctuating equities that may fall at times and not even pay a yield, you know there’s a lot not participating long in this market. So why do I feel bullish (apart from the fact that I am always optimistic and often get called a perma-bull) ?
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Avon is a British based company. Born out of Avon Rubber Tyres the business evolved into rubber milking products for cattle into respiratory masks and protective helmets and is now one of the leading providers of this equipment globally, with some of the best products in the world. Respiratory masks and Helmets have a 40/60 split respectively as far as sales go with respiratory being the higher margin business. They also manufacture Escape Hoods for quickly evacuation from a contaminated area swiftly – and fun in the bedroom.
These products are sold to the Department of Defence in the US (DoD) around the world to NATO as well as government departments like the police and environmental departments, together with diving companies and other private enterprises and first responders. With increasing global conflict and more violent demonstrations using more dangerous materials, the demand is increasing. These products take several years to develop and can take two years to get DoD approval, hence there is very high barriers to entry together with the long standing relationship developed by Avon with DoDs increasing barriers to entry. Respiratory has a good repeat business model with 40% of revenues coming from replacement filters and parts. According to the CEO, ‘the helmet business is at the start of a rapid period of growth and margin expansion’
In early 2020 Avon Rubber plc (as it was then) completed its $91 million acquisition of 3M’s advanced ballistic protection business which made body armour for the military. It also divested itself from the old Milking equipment business ‘Milkrite’. Buying the armour business proved a disaster. After several DoD tests failed and contracts cancelled Avon managed to dump the business, virtually giving it away.
In 2020 Avon acquired Team Wendy in the US, a company which also provides helmets to the military, law enforcement and leisure helmets used for climbing, first responders etc. Team Wendy was acquired for circa £100m. Revenue in the year ended 31 December 2019 of US$44.2 million and EBITDA of US$13.4 million resulting in an EBITDA margin of 30.3% Team Wendy is more targeted to the non-military market:
In May 2021, Nick Keveth, the CFOleft and the amusingly named Rich Cashin was appointed CFO in Jan 2022.
In May 2022 Paul McDonald stepped down as CEO.
The COO role has been removed.
Jos Sclater Appointed CEO
Appointed 16th January 2023, Jos spent the prior 3 years to his appointment at Avon as Group Chief Financial Officer at Ultra Electronics plc. In this role, Jos led a broad-based transformation programme focused on improving growth and efficiency. He also had Group-wide responsibility for the Finance, Treasury, IT, Procurement, Transformation, Continuous Improvement and Risk functions as well as direct oversight of Ultra's Forensic Technology and Energy businesses. Prior to this Jos was Group CFO at Castrol Lubricants and, before that, spent 7 years at GKN plc, including as Group CFO and Director of Corporate Finance & Strategy. Jos started his career as a qualified solicitor and held in-house legal and M&A roles at ICI plc, AkzoNobel N.V. and GKN plc.
OK, so what interests me about this company?
Firstly, it is a recovery play of huge potential imo. Not only do they have great products and huge barriers to entry but they have a change of board as far as CEO and CFO is concerned. Bad boards don’t become good boards, you need changes at the top. Jos Sclater comes with a great CV. Watching the company interim presentation you can see this is a guy that is confident and knows what he is talking about. The barriers to entry, the quality products means these products should command much better operating margins. In the trailing 12 months, with all the issues they have been dealing with, the operating margins have slipped to 2.5% after being negative 11.7% in 2021. In 2018 they were 13%. The sale of the armour business completes with the end of this financial year so with hat out of the way I expect margins to rise significantly. At the start of 2021 the shares were trading at £46 a share, they currently trade at just around £8. More importantly they have had no dilution, in fact there are now 30m shares instead of 31m as they have been doing buybacks, which the new board has cancelled.
In 2017, on $202m sales they were achieving 120c eps on the same amount of shares as around today – this year the sales will be $256, 20% higher than in 2017. The beauty of a recovery play is you have these past ‘playbooks’, you can see where a stock could return to when there has been no dilution. Jos Sclater reckons there’s no reason why they can’t getoperating margins to “mid teens medium term”.
New CEO Jos Sclater has been involved in several turnarounds, notably Ultra Electronics and GKN, both of which ended up in take-overs. I would also note that the board and the CEO are talking more upbeat and about recovery. This is just 10 months after Sclater took the CEO job – that is quick. I expect a genuine recovery play that is working to have news like this within 6-18 months. If there is no real sign in 18 months it probably isn’t going to happen imo. If the news is at the 9 month area the recovery has strong momentum usually, imo.
Another confidence factor for me is director buying to accompany the above characteristics – there has been no shortage of director buying since Sclater arrived:
Another further feature for me is the bowl on the chart in recent months – this is a clear chart change from all the ‘saw tooth’ ups and downs of traders hopping in and out to investors buying to hold and taking up those trader sells.
That gives me a lot of positive flags above.
They paid a 42.5 div over the trailing 12 months but at the interims they said this would be adjusted to make it sustainable so looks like a bit of a clip is likely. 14.3p c divi was paid at H1
The recent trading update is here
The interim results webcast video is here, a must watch imo – this convinced me to buy and hold. There’s interesting stuff in here like being able to save $1m per factory in waste reduction and how two factories were not even getting on with each other. They have one factory that isn’t currently making anything at the moment, or were not at the interims so getting some throughput thee could increase margins dramatically from unused assets.
One really interesting aspect I have picked up on is the development to delivery timescale. It seems the company quotes around or expects a product to take about a year or more to complete from enquiry to delivery but constantly see 6-12 months added onto this for revising the design and other delays including objections from competitors to slow up their progress in getting it through the appropriations committee. With Ukraine kicking off less than two years ago, the enquiries and potential orders this initiated, probably haven’t yet got to the stage where full committed orders have been placed but perhaps they aren’t that far away?
Currently trading on a PE for this year of 42 but with a trailing twelve month PE of 23 and a fwd PE for 2024 of 19.
Debt: “The year end net debt position on a covenant basis is now expected to be approximately $65m, as a result of the timing of cash receipts from the shipment of several large orders in the last month of the financial year. We expect the receivables associated with these orders to be paid during the first quarter of the 2024 financial year, which will further reduce net debt by up to $20m.”
Mk Cap £236m
Book Value 621p according to Stockopedia
Stockopedia show the earnings trend starting to turn up recently:
The Full Year results will be out on Nov 21st
I am still traumatised from having bought Avon down at the 30p bottom and selling at 40p at the financial crisis bottom in 2009, when it was the milking equipment business and never dreamed it could become what it has, so perhaps my view is coming from a sort of revenge investment or an attempt to repair my battered soul. But I look at this business, its technology, its moat, its customer base and the £242m market cap and I ask myself, could this become a FTSE250 business again, after all, that £46 high was just 3 years ago? Could it even have a market cap of £2.5bn in the future? I feel it has got that ability but you will obviously have your own view. All just my opinion, obviously do your own research. I am just revealing why I bought these and my thought process for general interest and this isn’t a recommendation.
Thank you for reading/
Rebel
Thank you Harry, agree regarding TUNE
Having previously been a holder I'm also kicking myself (bought at £14, watched it multi bag to £45 then watched it fall to £19 before getting out with only a modest profit - ouch).
Just one thing I would add to your commentary is the pension fund deficit which currently has annual deficit payments of $4.3m which is quite significant in relation to the current level of f/c PBT around $9m for FY '23.
Peter