LON:AVON | £AVON Discussion Thread - Hold Onto Your Hats …..

13th Nov '21 by gus 1065

21 comments 1705 reads

Avon Protection (LON:AVON) issued an RNS on November 12th, 2021 advising the market of a First Article Test failure of one of its body armour components and further delays in the approval of another. As a result it has initiated a strategic review of its entire body armour business and delayed release of its FY21 results.

Most profit warnings are ugly but this one wiped over 50% off the beaten down share price that was already some 60% or so down on its previous peak at the end of 2020. Taken together, that’s about an 80% fall. Falls of this kind are not unprecedented but it’s unusual for an established manufacturing company with a Q score consistently in the high 80’s or above - more typically it’s found in the Oil & Gas or Resource sector where a prospector hits a duster or where there has been fraud/ severe malpractice. (Possibly Indivior (LON:INDV) in the pharma manufacturing sector is the only recent comparable that springs to mind).

Quite a lot of insightful comment in yesterday’s SCVR which I thought I would pull into a single location before it gets lost to posterity and provide a dedicated thread to follow how the situation develops over time. Whether the company recovers its former glory or sinks without trace (who’s Trace? - getting ready for panto season) it should prove to be an interesting case study.

The devil, as always, being in the detail, here is the full text of the RNS.

“Body armor update

Following the contract awards for the U.S. Defense Logistics Agency (“DLA”) Enhanced Small Arms Protective Inserts ("ESAPI") and U.S. Army Vital Torso Protection (“VTP”) ESAPI body armor plates, we have been engaged with our customers to complete the necessary product approval processes. Disappointingly, the VTP ESAPI plates have encountered a failure in First Article Testing which will significantly delay the likely approval timetable for this product.

Separately, we have experienced further delays in obtaining final product approvals for the DLA ESAPI body armor plates, with approvals for this product now expected in the second quarter of our financial year ending 30 September 2022 (“FY22”).

Strategic review of body armor business

In light of these challenges, the Board has initiated a strategic review of our body armor business.

Our FY22 revenue guidance included approximately $40 million of body…

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Azhar Allahdad

13th Nov '21

any idea the impact on profitability of this division

Silver Moon

Well done Gus, this thread of yours will be viewed again and again.

BnB

This is why I have a very diversified portfolio. Avon’s 50% fall didn’t prevent a gain of 1% on the day, hitting performance by only 10 bps. I know 25-30 stocks is supposed to be the optimal balance but it would mean avoiding small and mid caps altogether, given the wide opportunities in global large caps.

gmtrader

Given the expected revenue drop of £40m and the fact that Avon Protection (LON:AVON) have an average operation profit of 11.66% I would hazard a guess of £25m-£30m loss of profits. As the sp has been in decline for a year now, I do wonder if there are more problems that will show up in time. The value of the company is not high enough for me to consider buying this last years decrease. Not enough info is known yet and only time will correct that. Technically the chart does not look good atm. It smashed through the 1450 support area and showed no real signs of any bounce in the day. The next real strong support I know see is at the 750 area. Sadly I see the sp continue to drop further on poor sentiment.

Only 10 days to go until the expected full year results on 23rd November where you would expect a full report on this problem and forward guidance given as well as a plan to what the company is going to do to get back on track.

Take away the sales forecast for the Body armour and Avon Protection (LON:AVON) still shows a growth on previous years, so everything is certainly not lost and it is possible that the issue can be resolved. So unless there are other problems to come out, then the sp should recover to some degree. Until the full impact is known though, I see a lower price to come.

Guybrush

Rule number 5: avoid serial gappers:)

gus 1065

Hi gmtrader.

Interesting to get a technical insight on Avon Protection (LON:AVON) . I agree investor sentiment has been cratered and this could go lower but FWIW I still rate the underlying business and don’t have a particular beef with the incumbent management (after all their financial loss certainly dwarfs mine) other than that perhaps with 20:20 hindsight the 3M acquisition/sale of their non-military business lines might not have been especially smart.

A couple of observations on your commentary. The estimated revenue drop is US$40m (not £) although not a huge difference in the scheme of things. Possibly worth noting too that this is a revision to 2022 revenues and that the RNS confirms their expectation that 2021 earnings are as previously advised to the market.

Also, as per the RNS last paragraph, the company states the results will be delayed from 23rd November until “early December” to allow them to undertake (some of) the strategic view of the body armour business and assess revised earnings estimates for future periods. There’s been quite a lot of flak thrown in the company’s direction over the last few months (much of it justified) but generally I think their level of communication if not the message itself has been pretty good. No news on 23rd of November shouldn’t be seen as yet another black mark!

Gus.

Moving the results due was a good idea and I missed the date change, using the date shown on stocko. 10 days until results would certainly not be enough to estimate the implications and come up with a plan.

Was flak an intended pun?

Logical David

Great idea Gus moving everything into one discussion thread. I don't hold £AVON.

However, for those investors who are thinking of catching a falling knife, the advice I would offer is not to catch a falling knife until you see both of the following conditions happening:

1. The flow of bad news stops and it starts being replaced with good news.

and

2. You see decent insider buying by the directors.

Some people will probably be wondering how low can a share go..... the answer is all the way down to zero!!!

David.

paulcity26

A fundamentally disastrous update, low on detail and context and this along with previous profit warnings and this must put a fundamental question mark on whether the senior management team should be allowed to continue.

From my calculations I consider that at least 50% of the loss in shareholder value yesterday is due to a loss of faith in the management team at £Avon.

I've based this on the fact that if we assume that as a worst case scenario Avon discontinues the body armour business and that next years sales of $40m would have generated profits of around $5m and we apply a multiple of 20x we get a loss of value of $100m. In addition to this write off of value for future years net earnings, I have assumed that the costs associated with next years sales will not be recovered thus adding another $35m in lost value. Finally, If the body armour business is closed then there will be associated closure costs - conservatively this might amount to another $65m. Adding these 3 elements together we get a total loss of value of $200m. This compares to a total loss of shareholder value of c. $406m yesterday. From my perspective this additional $206m represents a loss of faith in the management team and their ability address the fundamental issues in the business.

In the short term I can see £Avon falling further as institutional shareholders walk away and it will take some time for a new shareholder base to evolve. However, with a new management team and on the assumption that the problems are largely limited to the body armour division I can see some hope for a share price recovery next year. Finally, in my opinion, there is also now a realistic prospect of PE or other parties bidding for the business particularly if the share price continues to fall.

As a shareholder, I will continue to hold until the December update at least and maybe beyond but ideally I would like and expect to see some management changes before then.

As ever, just my opinion DYOR.

Db47

just looking and Bruce Thompson, chair at Avon Protection (LON:AVON) has spent circa £300k on shares (including 3000 at 4164p) I hope it's not evil of me to take some consolation in this as I nurse my loss... at least it illustrates the board didn't see yesterdays news coming, makes me feel a bit less of a fool...

Momoko Miyamoto

the much reduced market cap of below £300m will mean than unless there is a rapid bounce back in SP, many institutional holders will be forced sellers bound by their investing rules. The previously predicted growth will now not materialise so the derating is warranted. Management have questions to answer over their due diligence of the 3M acquisition and either heads should roll or litigation against 3M pursued. Neither is likely help the SP in the short to medium term.

tic_tac_toe

insightful, not inciteful - it makes quite a different to the perceived connotation.

'Quite a lot of inciteful comment '

Indeed. I’ll edit the text.

Gus.

Albertos

14th Nov '21

The previous profit warning was 13th August.

Closing SP on 12th August was 2,950 and 2,132 on 13th August - a fall of 28% - there was no bounce-back the following Monday.

A month later on 13th Sept the SP was 1,790 - a further fall of 16% - and it started to recover from there later. Then 12th November happened.

History sometimes repeats or rhymes - so I'm in no hurry. I'm definitely waiting until the accounts (or more accurately the result of the review) in early December.

Phil

Wilbraham

I know every situation is different, but this reminds me just a little of ill-fated Novacyt Sa (LON:NCYT) a covid-testing business which blew the doors off summer 2020 but whose sp had a huge fall-out this spring when they revealed a contractual dispute with their major client, UK's DHSC. Understandably (afaik) the circumstances of the dispute haven't been fully disclosed (eg was it performance issues or did DHSC substantially over-order in the covid mania?) but despite a couple of 30% bounces this summer/autumn the sp decline continues. It's just not a great idea to have a dispute with a prime and influential customer. Obviously there are real differences with Avon Protection (LON:AVON) - far more strings to their bow, for example - but as others have said, you may sleep more soundly by waiting until all the bad news is out before buying back in. Or as the Americans say, there's seldom just one cochroach in the kitchen!

my problem is whether to sell soon and take a fairly considerable loss (-46% / 1.5% of my holdings) ? maybe I should sell half ? maybe I should wait it out over the long term ? In hindsight this was too risky, my confirmation bias told me supply chain problems would be resolved and tests passed, I should have cut my losses after the last little bounce but then again the September RNS did contradict Fridays bombshell. A valuable lesson learnt...

15th Nov '21

Relatively reassuring update from Stifel, moving the TP by “only” -19% and a possibly short-lived bounce this morning

Rusty2

Shares are up around 11% today, so maybe a time to exit or sell half, I’m looking to dump soon.

Neil D56

GM-I think that's a tad late- technically no chart would look good after such a one day drubbing. The writing on the wall for Avon Protection (LON:AVON) looked dodgy once it had taken out the 2700 area, after initially holding there- you may say that I'm using a 'rearview mirror' but I invariably use Ichimoku cloud cover as support and resistance areas on weekly charts, and it fell through this point quite decisively, and now has breached the monthly for that matter.

Also not sure how 750 becomes valid as support. Any long here is purely a punt and based on being oversold ahead of further fundamental updates.

Yep it's the bounce of a 'lead balloon'. Any longs here are purely a punt against being oversold until further fundamental news. Volume was heavy on Friday signalling widespread capitulation. Interesting how the signs were 'on the wall' when it took out the weekly cloud cover around 2700.

£AVON Discussion Thread - Hold onto your hats …..

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Gus 1065

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