Despite trading on a high price earnings ratio of 19 times, Mark Watson-Mitchell sees further upside in the shares of Avon Rubber as takeover activity in the defence and security sector remains high.
This stock is yet another of the high-price variety – trading at around £17 a share – so if you prefer penny stocks then just look away.
What I like to see in a company is that its quality comes to the fore in its marketplace. And that is just what happens with Avon Rubber (LON:AVON).
Although it can trace back its history over 134 years to when it did make pneumatic tyres, which were products that practically every one associates with the company, today it has no interest in making tyres, having sold off that side way back in the 1990’s.
The development of the group that today makes up Avon Rubber has seen it make various strategic acquisitions that have taken it into new and big growth sectors.
Its origins as a rubber manufacturer took in a range of products, not only tyres, but also railway components, conveyor belts, sports equipment and milking machine tubes.
The company, which listed in 1933, was a key manufacturer to the UK Government in the supply of some 20m gas masks during the last World War.
The post-war years witnessed the birth of Avon as a fledgling international group. It set up a production base in Germany and in the 1970’s broke into the US market.
A spate of US acquisitions in the 1990’s was focused upon it becoming a leading manufacturer of rubber dairy liners and that was when it also acquired the ‘milkrite’ brand, which was subsequently to become a major interest within the group.
In 2000 the company won a major contract that has evolved as a significant part of the balance of the group’s business – that was in the development for the US Department of Defence of a general-purpose respirator, eventually turning that into a mega ten-year sole source contract.
The 2005 acquisition of another US company saw it take in a manufacturer of self-contained breathing apparatus for the fire market.
The launch of the dairy side’s revolutionary mouthpiece vented liner in 2010, was subsequently launched into the EU. This side opened facilities in China in 2012 and in Brazil two years later.
Other acquisitions by the dairy side, like an electronic milking components business, and a calf nurser company, were all bundled together into what is now the group’s Farm Services division, which makes up some 30% of the international group.
Today it is a global leader providing complete milking point solutions to dairy farmers across the world – with the aim of improving every farm it touches, through efficiency and improved animal health.
The Avon Protection division, which makes up 70% of group revenues, is today the recognised global leader in advanced chemical, biological, radiological and nuclear respiratory protection systems for the world’s military, law enforcement and fire markets.
Its innovative technology, its market leading positions, its long-term pedigree for performance and quality, its know-how and intellectual property all combine to make very high barriers to entry for any of its competitors.
Today the group sells its equipment, its consumables and its services to customers in over 90 countries across the world.
And what is more it is still looking to expand its offering by way of strategic acquisitions – such as the August announcement of it acquiring 3M’s ballistic protection business, once US regulatory permissions have been granted, which should be in early 2020.
The group will be announcing its results for the year to end September on 13 November – and they should be a strong set of figures.
Brokers are estimating that group revenue will have improved from £165.5m to £178.6m, with pre-tax profits increasing from £27.2m to £30.5m.
For the coming year sales of £190m and profits of £34m are on the cards, worth 88.5p per share in earnings, upon which the company could pay a small dividend of 27p.
It is, however, highly cash generative as a business and is maintaining a strong balance sheet, so we can accept such dividend meanness.
With just over 31m shares in issue, the group is valued at around £530m.
Institutional shareholders include: BlackRock, Fidelity, Franklin, Cavendish, JP Morgan, Aberdeen Asset, M&G, Legal & General, Mackenzie Financial and Hargreaves Lansdown.
The shares are currently trading at around the £17 level, having peaked a month ago at £18.54, following the 3M ballistic news.
Considering the takeover activity in the defence and security sector, and also the US keenness on acquiring our better companies, the 19 times price earnings ratio does not put me off in rating the shares so highly.
I see them climbing back to their previous peak and then well above, with an attempt at £20, possibly before Christmas this year, and up to £22.50 before the end of next year.