Avon Protection (AVON): body-armour bombshell

Avon Protection (AVON) has owned up to a body-armour bombshell and the shares have crashed 50% to £10.

I wrote about the company for SharePad during January this year at £30, so a revisit is in order to see if any clues of trouble were apparent beforehand.

The latest statement said:

"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”).

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 armor revenue. In light of the above, the financial contribution from our body armor business in FY22 and beyond will be significantly reduced, with the ultimate impact, including any associated cost savings, depending on the outcome of the review process."

The body-armour division was acquired as part of this deal with 3M during 2019.

The 3M deal was somewhat confusing. From that SharePad article:

"What’s more, Avon’s 2020 results documents do not suggest the acquisition will enjoy increased orders during the next few years.

You see, this former 3M division generated revenue of $85 million during 2018…

…but the acquisition contributed revenue of $52 million to Avon for the nine months to September 2020…

… and revenue of $52 million over nine months equates to $69 million over twelve months — i.e. less than the $85 million reported for 2018."


"I interpret this annual report small-print as saying Avon will pay an additional £15m if total three-year sales from the former 3M division reach $241 million.

Three-year sales of $241 million equals average annual sales of $80 million — i.e. less than the $85 million reported for 2018.

Other concerns with this former 3M division include:

  • Minimal profitability: The acquisition recorded just a $3 million profit prior to purchase, and;

  • Contract delays: Avon’s December warning of contract delays (more on which later) related to products developed by this new subsidiary.

Suffice to say I would be investigating this acquisition further if I were an Avon shareholder."

So questions were already forming almost a year ago. The December warning I referred to in the SharePad article concerned delays to the ESAPI contract that was mentioned in today’s AVON bombshell.

Moving to May 2021, and AVON’s H1 confirmed the ESAPI contract was important…:

“The legacy DLA ESAPI contract remains an important part of the medium-term revenue outlook for the ballistic portfolio. We have conducted a thorough review of the first article testing failure that was confirmed in December and have finalised revised product designs to address the identified issue. We are currently manufacturing test samples of the new design and remain on track for these samples to be submitted for testing during our fourth quarter and for deliveries to commence in the first half of our next financial year.”

…but did not repeat the ESAPI contracts being worth up to $333m as per the preceding results:

  • Three-year legacy Enhanced Small Arms Protective Inserts (“ESAPI”) body armor sole source contract with a value of up to $333m secured with the U.S. DOD

Alongside the H1 statement the CFO decided to leave:

“Avon Rubber p.l.c. announces that Nick Keveth, Chief Financial Officer and Executive Director, has informed the Board of his desire and intention to retire for personal reasons before the end of March 2022. This will enable him to manage the completion of the current financial year ending 30 September 2021 and to make an orderly handover of his duties to his successor.”

No successor was named, so his decision seemed sudden.

During August 2021, Covid-19 disruptions prompted a lower projected FY margin:

“The result of the lower [$245m-$260m] revenue expectations, combined with an adverse mix effect and an overhead base that is fixed in the short term, means that adjusted EBITDA margin guidance is expected to reduce to between 17% - 18% for FY21, before recovering thereafter.”

Then during October 2021 projected margins were reduced further due to “ballistic protection inventory adjustments”:

“Trading profitability in the remainder of FY21 was in line with the expectations set out in the August trading update. The Group will however recognise one-off, non-cash, ballistic protection inventory adjustments, which are expected to reduce the reported adjusted EBITDA margin for FY21 to between 15% and 16%.”

Ballistic protection” refers to the 3M business, and the 2% lower margin implied a $5m stock write-off – a not insignificant amount when the 3M business was acquired with stock of $18m.

October’s update was also bullish on body armour:

“We carry significant commercial momentum into FY22, which will also benefit from a strong ramp-up in body armor, as well as the strengthened senior management, processes and infrastructure we have put in place over the past year whilst navigating the ongoing disruption related to Covid through our supply chains.”

So the 50% share-price drop could be understandable when one month later, AVON now talks of body-armour revenue of up to $40m (versus total revenue of $250m for FY21) disappearing from FY22 and beyond.

Looking back, I think the main clues to something not being quite right with the 3M deal were already evident back in January. The CFO then leaving was not ideal, and questions could have been asked about whether the ESAPI contracts still had up to a $333m value, and what exactly the stock write-offs related to (the ESAPI work?).

My SharePad article did say:

"Last year both the adjusted operating margin and adjusted return on capital employed were very healthy at approximately 23%. The group’s own cash-conversion calculation was a welcome 123% as well.

Perhaps such robust ratios are to be expected when the business develops specialist, life-preserving equipment — for which competition is limited and contracts are often awarded on a sole-supplier basis"

But also said:

I must confess the immediate [42x P/E] valuation feels very cheerful given:

  • The organic sales ambition of only 3%-plus;
  • The complicated financial history blighted by adjustments;
  • A growing fondness for hefty acquisitions;
  • A dependence on a single customer, and;
  • The contract wobbles at a new subsidiary.

The over-riding lesson I suppose is when a share price is highly rated, selling ‘quality’ products may not be enough to counterbalance difficulties with significant contracts acquired from other parties.



hi Maynard

I read your AVON article for Sharepad at the time and was then a holder. Your assessment was spot on and after some reflection I fortunately bailed out in August at 1850p which got me out on a break even basis.

In addition to your Sharepad article I also felt uncomfortable with the $80m pension fund shortfall.

Given the mistakes made with the 3M acquisition I’m now wondering whether there may also have been similar inadequate due diligence carried out on the subsequent Team Wendy acquisition? If so there may be further bad news to come.

Management have failed badly here and their competence must be in question.


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Hi Maynard - Thanks for your detailed review of AVON in the light of today’s shocker.

AVON was on my radar a few times earlier in the year, but it was quickly dismissed because the share price chart was wrong. Let me explain what I mean.

A number of times in the past I have either been invested in or looking to invest in a particular company, but the sp chart showed a consistent downward drift. This is despite all the reassuring news emanating from the company that everything was fine and “in line with expectations”. So there was a clear disconnect between what the sp chart was telling me and what management was telling me. At least on three occasions in the past I trusted the chart over management, bailed out and avoided major losses.
With AVON, the chart peaked around December 2020. Subsequently, AVON’s management issued a number of trading updates and earnings reports until today’s bombshell.
From January onwards, the slide in the share price was happening persistently, despite bullish and reassuring noises from management.

In one instance (I cannot remember the name of the share) I did post on the BB my misgivings based on this rationale. All I got back were abusive replies. Four months later, the share tanked.

Best wishes, Ram


The year to September 2020 looked dodgy to me (fcf vs rep eps vs co adj eps) so I fortunately sold out last year. Makes up for my botb blunder! :grimacing:


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Your Sharepad write up seems very fair to me and certainly highlighted potential issues. I looked at Avon a few years ago and was quite interested in the protective equipment story - a good use of rubber, their history, and a solid customer base. The move into armour baffled me and I was glad not to have been caught in a value trap