Questor share tip: Avon Rubber a buy

Avon Rubber
627p+16
Questor says BUY

AVON rubber is changing the way it sells its products to customers and that is having a startling impact on profitability. The company reported a sharp increase in both profits and the dividend in its first-half numbers yesterday, making the shares well worth a look.

Avon Rubber manufactures gas masks and rubber items used by dairy farmers in the milking process. Yesterday, the company said it had experienced “strong growth during the first half of its financial year and that it expected further growth in the second half. Adjusted pre-tax profits increased by 45pc to £8.2m, while revenue for the same period only increased by 3pc.

That is because Avon is steadily taking control of its distribution network allowing it to charge retail prices rather than wholesale prices for its goods. The difference between the wholesale and retail price can be as much as 33pc. Analysts are currently expecting a 17pc increase in full-year pre-tax profit to £15.3m, but on these first half numbers that looks conservative.

Although defence budgets are under pressure worldwide, Avon is expecting a strong second half of gas mask sales. Order intake in Protection & Defence was up 15pc to £46m .

The majority of the profit, or 83pc, comes from the provision of gas masks to defence clients. Avon is well placed as the sole US defence supplier locked into a 10-year contract, on which it is currently about midway. Avon said orders of its M50 gas mask provide revenue visibility well into the second half of the year.

The reported results for the six months were less impressive with pre-tax profits of £5.7m, only marginally ahead of £5.5m at the same stage last year. Avon took charges of £2.3m during the period, the majority of which relate to closing down old manufacturing facilities in the US. The company expects to make savings of £1m a year from next year following the closure.

Avon generated plenty of cash during the first half and this resulted in net debt falling sharply to £5.5m, from £9.9m a year ago.

The interim dividend was increased by 30pc to 1.87p, with the shares going ex-dividend August 7 and payable September 5. Although the full-year dividend only offers a forecast yield of 0.8pc, it is expected to increase by more than 20pc for each of the next two years.

The company is increasing profits and has a strong balance sheet so Questor upgrades the shares to a buy.