Military equipment maker and popular retail investor stock Avon Rubber (AVON) compounded its nightmare before Christmas after delays on an important US defence deal forced the company to warn that its full year performance will be hit.

The FTSE 250 company said on Thursday that initial deliveries under its ballistics contract with the US Army would reduce overall expectations for the year to 30 September 2021.

The news shock saw the share price plunge nearly 14% to £32.17, making the stock the biggest faller on today’s FTSE All-Share loser board.

ORDER TIMELINE SHOT TO PIECES

Orders under the company's contracts for the US Defence Logistics Agency Enhanced Small Arms Protective Inserts and US Army Vital Torso Protection body armour will not start early in 2021 but instead will be knocked into the second half of the year. This was thanks to bit of kit failing tests.

Making matters worse, Avon Rubber also had to own up to the fact that a protest against its recently announced sole source contract to provide the US Army with ‘Next Generation Integrated Head Protection Systems’ means that there will be no meaningful revenue this year.

The company remains positive longer-term, with chief executive Paul McDonald saying ‘we remain very confident in the group’s medium-term prospects which are built on a strong, growing and visible contract pipeline, together with a clear strategy.’

Analysts at Jefferies largely agree on the medium-term outlook, flagging the firm’s strong balance sheet, but they will feel compelled to slash 2021 full year forecasts.

PROFITS HIT BY UP TO A FIFTH

‘Post this update and the likely $50 million shortfall, we expect a significant impact to full year 2021 consensus earnings before interest, tax and amortisation (EBITA) and pre-tax profit’, perhaps as much as 20%.

Avon management is expected to pull cost saving levers but ‘there will likely be a circa 25% drop through from lower revenues’, said the Jefferies’ analysts.

Before today’s news, consensus called for EBITA of £57.7 million on revenue just shy of £300 million, according to Refinitiv data.

This was unfortunate timing for the company, coming just two weeks after revealing that profits for last year (to 30 September 2020) were almost wiped out after taking £17.8 million in one-off costs from its Team Wendy acquisition, which completed in early November.

The company unveiled statutory pre-tax profit of £0.5 million, having crashed from £8.7 million the year before. Avon Rubber shares hit an all-time high £46.25 on 1 December 2020.

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Issue Date: 17 Dec 2020