Avon Rubber

A trading update from gas masks to dairy products specialist Avon Rubber (AVON) has confirmed that it is on track to meet current-year expectations, but it is likely to be second half loaded.

In its defence business, Avon has secured orders that will allow the group to deliver increased volumes of its M50 respirator. Avon also recently announced a five-year deal worth $176m for its M61 filter, with a short-term requirement to deliver products to the value of $2.5m.

An issue has been raised whereby one of the losing bidders to the filter spares contract has raised a contractual protest to the US Department of Defense, which will delay delivery dates by up to 90 days until it is sorted. However, Avon has reassured investors that this hiatus will not have an impact on the shipping of its three-year filter order worth $6.1m. The pipeline of new business is strong, and work continues on enhancing and broadening its current product range to help secure new contracts.

The strong market in dairy continues, so this has helped boost sales of its Milk-Rite brand. Avon has also notched up a 10% market share in North America for its Impulse Mouthpiece Vented product. Margins may be held back in the short term due to investment in a new sales and marketing centre in China that will help to target business in the country.

Avon predicts that the emphasis will shift to the second half this year, due to the timing of filter sales as replacement and new stocking kicks in. Net debt has fallen to £7m (September 2011: £11.8m) but this is as a result of timing and will increase as Avon stocks up to supply filter orders.

Investec predicts 2012 pre-tax profits of £11m and EPS of 25.1p. We last recommended the shares as a buy at 270p, but the delay in the filter contract is clearly a blow – forcing the shares down 22p to 298p. Hold.