Avon Rubber Plc – Discontinued a business segment

Avon Rubber Plc (LON: AVON) is a United Kingdom-based Technology Company.It specialises in life-critical personal protection systems and milking point solutions through the two businesses, Avon Protection and milkrite | InterPuls.

On 21 September 2020, the Company will announce the pre-close trading update.

Rationale for Valuation - Watch at GBX 3,760

1. The Company has further reported that in the 2020 financial statements, milkrite | InterPuls will be treated as a discontinuing operation.

2. Return on equity was lower than industry; AVOV is highly leveraged as compared to the industry.

3. Trading near a 52-week high and seems overstretched at the current price.
 

Recent News

On 19 August 2020, the Company informed that Avon Protection had been awarded a 10-year contract by the NATO Support & Procurement Agency. The contract is for supplying FM50 mask systems, powered and supplied air systems, filters, spare parts and accessories.

On 2 July 2020, Avon Rubber announced that it was going to divest milkrite | InterPuls. The Company had signed an agreement with DeLaval Holding BV to sell milkrite | InterPuls. The agreement is for a total cash consideration of £180 million and debt-free basis. The completion of the deal anticipated to take place in the Q1 2021. In 2020 financial statements, milkrite | InterPuls, will be treated as a discontinuing operation.

Financial Highlights (H1 FY2020)


(Source: Company Website)

On 19 May 2020, the Company provided a half-year results for the period ended 31st March 2020, with a decline in the order received.  In H1 FY20, the revenue increased by 28.7% year-on-year (9.5% organic constant currency growth), to £94.7 million, with an 18.8% contribution from the acquisition and a small 0.4% currency tailwind. Adjusted operating profit surged by 73.3% year-on-year to £15.6 million (H1 FY19: £9.0 million) in H1 2020. At 31 March 2020, the Company reported net debt of £66.9 million (FY2019: net cash of £37.0 million) following completion of the Helmets & Armor acquisition. The Group witnessed a strong balance sheet and good liquidity. Interim dividend per share increased by 30% to 9.02 pence.

One Year Share Price Chart


1-Year Chart as of 24 August 2020 after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The COVID-19 pandemic is affecting all the key markets and locations of Avon Rubber.Changes in environment-related laws and regulations could affect the overall business of the company. The Company’s financial performance may be adversely impacted by lower defence spending by major customers. Brexit uncertainty could also hamper the operations of the company.

Valuation Methodology



Conclusion:

The decent opening order book of £115.5 million provides good visibility for the future. It has enhanced the growth prospects for Avon Protection with the completion of the Helmets & Armor acquisition. The Board remains confident that the business is well placed to continue to deliver sustainable growth in the medium-term. The Company has reported that in the 2020 financial statements, milkrite | InterPuls will be treated as a discontinuing operation. The return on equity was lower as compared to the industry median. Moreover, the debt-equity ratio was marginally lower against the industry median. The Company is trading near a 52-week high, raising doubts at the upside potential at current prices. The Company’s Price/Cash flow, EV/Sales and EV/EBITDA multiples are significantly higher as compared to the industry multiple, reflecting overstretched valuations. The stock made a 52-week low and high of GBX 1,552.00 and GBX 3,980.95, respectively. From the technical standpoint, 14-day RSI is currently close to the overbought zone, which means there is a likelihood for a short-term correction in the stock price.

Based on the above rationale, we have given a “Watch” stance on Avon Rubber Plc at the closing market price of GBX 3,760.00 (as on 24 August 2020), while we will look for catalysts in the near term such as NATO Support & Procurement Agency Contract.

Clipper Logistics Plc – Overstretched amid uncertain outlook.

Clipper Logistics Plc (LON: CLG) is a provider of value-added logistics solutions, e-fulfilment and returns management services to the retail sector to support their online trading activities.

Rationale for Valuation - Watch at GBX 404.00
 

1. Trading near a 52-week high and P/E metrics are higher than industry.

2. The general economic conditions remain uncertain due to the COVID-19 pandemic.

3. Technical standpoint, 14-day RSI is currently close to the overbought zone, which means there is a likelihood for a short-term correction in the stock price.
 

Financial Highlights (FY2020)

On 24 August 2020, the Company provided a final result for the year ended 30 April 2020. The Company continued to make good progress in FY2020, with the revenue increased by 8.8% year-on-year to £500.7 million (2019: £460.2 million) and EBIT increased by 19.1% year-on-year to £24.1 million. Excluding the impact of IFRS 16, the cash generated from operations stood at £31.9 million.The Company’s net debt decreased by £0.8 million year-on-year to £45.1 million, driven by a reduction in HP and finance lease contracts of £3.0 million. The Board proposed a final dividend per share of 6.2 pence, making a total dividend per share of 9.7 pence for the full year (2019: 9.7 pence).

One Year Share Price Chart

 

1-Year Chart as of 24 August 2020 after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The Company is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in currencies other than Pounds Sterling.CLG’s operations can be affected negatively due to ongoing uncertainties created over the Brexit or COVID-19, as it would disturb the supply chain. The general economic conditions remain uncertain due to the COVID-19 pandemic.

Valuation Methodology



Conclusion

The Company has experienced a positive start to the financial year 2021, with an increase in demand. Consequently, the Board expects that CLG’s results for the financial year 2021 will comfortably exceed market expectations. However, the general economic conditions remain uncertain due to the COVID-19 pandemic. It has a decent pipeline of new business activity. The Company is trading near a 52-week high, raising doubts at the upside potential at current prices. The Company’s Price/Earnings multiple is significantly higher as compared to the industry multiple, reflecting overstretched valuations. The stock made a 52-week high and low of GBX 439.00 and GBX 130.00, respectively. From the technical standpoint, 14-day RSI is currently close to the overbought zone, which means there is a likelihood for a short-term correction in the stock price.

Based on the above rationale, we have given a “Watch” stance on Clipper Logistics at the closing market price of GBX 404 (as on 24 August 2020), while we will look for catalysts in the near term such as longer-term changes to the retail landscape.
 
*All forecasted figures and Peer Information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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