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The Great Unlocking

12 April 2021

Tea and cake in the rain. A snow-covered coffee and sandwich. Even a pint in the sleet. All were available to the enthusiastic unlocker on Monday. Personally, I can wait although I fully understand those that feel we should all be doing our bit to aid the commercial recovery. I am wholeheartedly in support of that ideal or at least will be as soon as I can do it in rather more clement conditions. The longest day is only two months away so the al fresco bevvy is tantalisingly close, I’m sure.

Our stock market has been looking a little perkier too, the FTSE 100 having recently hit its best level since April last year. Yet, despite this, the UK remains at a notable discount to other major stock markets. This anomaly has remained in place for some years but we have been saying for a while that it is likely to be coming to an end. The value offered by our listed businesses is proving too good to resist for those overseas companies with highly rated stock (particularly US) and fat wallets and aggressive private equity houses.

Put yourself in the position of a US corporate giant with a share price sitting on a multiple of 30 times earnings. A UK listed stock operating in the same field is probably on a multiple of 15 – 20 and possibly less. Not only that but the UK company is probably doing a fair chunk of its business in the US already so adding to the attractions of a cheap acquisition for the US giant. One can see why the list of UK takeovers by US companies is growing and we can only see this trend increasing.

One such possible target appears to be Avon Rubber. This has been a great stock for many years during which its management has not put a foot wrong. Having sold its dairy products business last year at a very healthy price its emphasis is now on military body armour such as torso protection plates and protective inserts. It used the dairy proceeds to acquire a US helmet manufacturer at an extremely good price and is now a major supplier of headgear to the US military.

The shares took a sizeable knock last November when testing delays for body armour contracts with two US agencies held up approvals. The share price fell from around £45 to the low £30’s. However, the contracts were not lost, just delayed and Avon has confirmed it is on target to complete the testing in line with expectations. In the meantime a major US military contract for ballistic helmets has been both increased in size and extended in length and order books across all areas of the business are showing healthy growth.

The point is that, with such a cracking management record, Avon’s share rating had been in line with US counterparts – a very heady multiple of 35 times this year’s expected earnings, falling to around 27 times next year. However, following November’s price decline that multiple becomes much more tempting. The shares have recovered to £34.70 leaving them on a likely multiple of around 27 for this year and 21 for next. That must look a tempting sight from across the pond.

Capitalised at just over £1bn, Avon could prove a tasty morsal for a US predator, making the shares speculatively attractive for those with at least a medium/high risk profile.

Russell Dobbs FCSI
Chartered Wealth Manager