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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (247)  | Author's Website |

UK-Based Small Cap Avon Rubber Down With Brexit

Manufacturer of gas masks and milking products is very reasonably priced

December 22, 2016 | About:

Avon Rubber (AVNBF) is a U.K.-based small cap that manufactures gas masks and milking products. The stock has been sold off with Brexit issues but is reasonably priced.

Avon has 38.89 million shares, the stock trades for 10.58 pounds ($13.08), and the market cap is 411 million pounds. Earnings per share are 0.633 pounds, and the price-earnings (P/E) ratio is 16.7. The dividend is 9.48 pence, and the dividend yield is 0.9%.

Sales grew from 117.57 million pounds in 2010 to 142.88 million pounds in 2015. Good top-line growth. Free cash flow is 23.5 million pounds, and the free cash flow yield is 5.7%. That’s a nice yield in today’s low-return environment. Operating margins are usually in the low double-digit range, and the free cash flow is a little high compared to average. Earnings per share have grown from 0.14 pounds since 2010. Again very good growth.

The balance sheet shows 4.5 million pounds and 20 million pounds in accounts receivables. The liability side shows 2.5 million pounds in loans, 24 million pounds in accounts payable and no long-term debt. Bulletproof.

Avon Rubber started in 1885 as a clothing mill on the banks of the Avon River in Great Britain. As you might guess, the company has nothing to do with Avon (NYSE:AVP) makeup. In the next few years, Avon produced bicycle tires and tennis balls. The company was taken public in 1933 and was producing automobile tires for Rolls-Royce (RR.) by that time. With the outbreak of World War II, Avon began producing gas masks. In the 1990s, the company sold off its tire business and also acquired a business manufacturing products for the dairy industry. By the 2000s, the company got out of automotive and concentrated on defense and dairy, which is where the company is today.

Avon Protection makes high-tech gas masks for the defense, chemical, biological and nuclear industries. The masks look like what the pilots wear in Star Wars movies. They also have the Darth Vader look going on. The Dairy business is entirely different – Dairy manufactures meters, liners and tubing. About 70% of revenues come from Defense and 30% from Dairy.

I found out about Avon Rubber by reading FPA International’s quarterly report. “Avon Rubber is a small holding company with various business interests. Most notably, the group is the sole provider of field protective masks to the U.S. Department of Defense. It is also a leading manufacturer of dairy liners under the Milkrite brand, which primarily sell in the large North American market. As such, while domiciled in the U.K., the group is primarily a U.S.-based business.” I didn’t see any other notable major shareholders.

Avon purchased three companies in 2015: Hudstar, a U.S. maker of respiratory equipment, InterPuls, an Italian maker of milking equipment, and Argus, a U.K. maker of thermal imaging. The company lost its chief financial officer, Andrew Lewis, to U.K. defense manufacturer Chemring (LSE:CHG) last week.

Avon is the sole provider of gas masks to the U.S. military. It has also won some contracts with Middle East militaries. It is midway through a 10-year contract. As one might expect, weak milk prices have held back the milking division. Shares fell 14% earlier this year on weak results from the milking division. Milk prices took a dive in 2005, falling from $25 per hundred weight to about half that price in 2016. Since then, prices have recovered to $17.37.

So Avon Rubber is dependent upon its big contract from the Department of Defense and the price of milk. I like this company and the stock price. It could be a buy, but I’d like to see the product first.

Disclosure: We do not own shares.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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