Edison Investment Research Limited: Avon Protection (AVON): Refocused Protection set to resume growth

London, UK, 21 January 2022

Avon Protection (AVON): Refocused Protection set to resume growth

Avon Protection should be well positioned to recover strongly following the value destruction caused by the relatively small Armor activity, which now faces a managed closure over the next two years. Future growth rates are diminished by the exit but remain healthy in the further focused core of Respiratory and Head Protection. Management needs to restore investor confidence as it continues with its growth strategy, in order to regain the historical premium rating to its UK defence peers. In this note, we reset our forecasts and valuation to reflect the revised shape of the business.

The FY23e P/E of 12.6x represents a c 13% discount to its UK aerospace and defence peer group. We feel that as the Armor issues should now recede, this is undeserved given exposure to the US defence market, strong core EBITDA margins, cash flow and growth expectations as the company addresses growing global chemical, biological, radiological and nuclear (CBRN) and other threats. Our reset capped DCF valuation returns a fair value of £16.75 or $22.78 per share.

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