Chief exits high-flying Avon Rubber

Avon Rubber had a decent first half, beating last year's strong numbers. Revenue was up, margin improved and earnings per share rose by 10%. The dividend increased by 30%, too. However, it is chief executive Peter Slabbert who is grabbing much of the attention after announcing he's stepping down in September for "a change in lifestyle". Shares in the gas masks-to-dairy products firm are up over 17% since we backed them in October, but is change at the top a reason to sell?

Certainly, Slabbert has done an excellent job at Avon. He's been there for 15 years and, since becoming CEO in 2008, the share price is up from 90p to 774p currently, within touching distance of an all-time high. Progress on profits and cash flow in a time of defence budget cuts makes it all the more impressive.

It's unclear who will take Slibbert's place, but Avon has a strong board packed with experience. Indeed, Pim Vervaat who runs successful plastic packaging firm RPC became a non-executive director there last month. Avon's current finance chief Andrew Lewis is ex-PricewaterhouseCoopers and a former Young Finance Director of the Year.

Whoever gets the top job will inherit a business in great shape. Revenue rose by 2% in the six months ended 31 March 2015 to £62.8 million and margin improved by 20 basis points to 13.6%, driving adjusted pre-tax profit up by 4% to £8.4 million. Favourable US Department of Defense (DoD) payment terms caused a swing to net cash of £7.3 million, worth 24p a share.

Numbers at Avon’s core gas masks business - Protection & Defence - tend to be dictated by a huge 10 year sole source contract with the DoD. Revenue was flat this time at £45.3 million and operating profit fell slightly to £6.4 million. It's largely due to the expected doubling of low margin sales of M50 respirators to the US. Divisional net margins still improved, however, and a further order for 106,000 masks will keep the company busy deep into 2016.

In all, Avon won orders worth £47 million in the first half, with £28 million for delivery in the second half. Expect news on mask contracts in the US fire market and in the Middle East over the next few months, too, say management.

Avon's dairy business had a record year - revenue was up 10% at £17.5 million, but growing sales of higher-margin Milkrite products - liners and tubing used to milk cows - sent margin up to 22% and profit up by over a fifth to £3.3 million.

A Cluster Exchange service, which basically does the farmer's dirty work for them by taking away their old "clusters" (the four-pronged device used to milk cows) and send them a new one, is growing faster than expected. There's huge potential for Avon's services in China, Brazil and India, too.

At 774p, Avon Rubber shares trade on 17 times EPS estimates for 2015, dropping to 16 times for next year. That's not necessarily cheap, but there's lots of growth to go for, a healthy order book and the strong dollar is a tailwind. Nailing export orders will also force a rethink on City forecasts.

John Cummins at WH Ireland still rates the shares a 'buy' with 900p price target based on a full-year 2016 enterprise value-to-cash profits multiple of 10 times. Investec sticks with its 800p target.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.