Top UK Stocks: Avon Protection shares plunge on lower expectations

Avon Protection slashes guidance, Babcock kicks off its asset sale programme, Vectura opts for the more controversial offer from Philip Morris, Thungela benefits from higher coal prices, and McColl’s shares fall further after completing its highly dilutive equity placing.

UK

Top News: Avon Protection slashes revenue and profit expectations

Avon Protection warned revenue and earnings will come in significantly lower than expected in the current financial year because there have been delays in receiving a number of payments for some large orders and due to problems within the supply chain, warning it will spread into next year too.

Avon Protection shares plunged over 20% in early trade this morning at 2321p, hitting their lowest level since April 2020.

The company, which makes respiratory and military helmets used by soldiers and first responders around the world, said revenue in the year to the end of September 2021 will be $245 to $260 million lower than previously thought.

Avon said this includes the delayed payment of $16 million worth of orders under existing contracts, including a significant one for its M50 gas mask, due to bottlenecks within the procurement process. Lead times for electronic and textile components of its products has also lengthened, delaying the shipment of around $6 million worth of deliveries.

Avon Protection said there were ‘remaining uncertainties’ as to when it will receive the cash for other orders that it expects to receive and ship before the end of the year. This will also have a major impact on earnings this year.

‘The result of the lower 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,’ said Avon Protection.

The problems will also weigh on cashflow and will mean cash conversion will be just 50% this year.

Avon Protection said it is confident the delayed orders will come through as expected over the ‘coming months’, but said the issue is likely to spread into the new financial year. That has prompted it to slash $320 to $340 million from its revenue expectations for the year to the end of September 2022.

‘We have made considerable commercial progress over the last 18 months in building a broad portfolio of significant, multi-year contracts across the business, with the underlying demand momentum continuing, so the short-term disruption that we are seeing is unwelcome. These issues will be resolved  over the coming months, but as they are affecting both our customers and suppliers simultaneously the situation has significantly limited our operating agility in the short term,’ said chief executive Paul McDonald.

‘We remain as confident as ever about the medium-term prospects of Avon Protection, underpinned by a record order book, a growing and visible contract pipeline and world leading businesses and technologies. We will carry significant momentum into next year, which will also benefit from a strong ramp-up in the Ballistics business, and remain well set for growth in FY22 and beyond,’ he added.

Avon Protection said it took $221 million worth of orders in the ten months to the end of July. That has grown 13% year-on-year when Team Wendy is excluded, or by 21% when the unit is included.

Babcock sells Frazer-Nash Consultancy to kickstart asset sale programme

Babcock International said it has agreed to sell Frazer-Nash Consultancy for £293 million in cash, which will make a huge contribution to offload at least £400 million worth of assets within the next year.

Babcock announced in April that it was restructuring itself to focus on its aerospace, defence and security businesses in the UK, France, Canada, Australia and South Africa after reviewing the profitability of its balance sheet and contracts – leading it to book £1.7 billion worth of impairments and a reduction in annual profits of around £30 million going forward.

That pushed Babcock into the red during the financial year to the end of March

This plan includes selling £400 million worth of assets over the next 12 months, which should help Babcock return to growth without the need for raising equity from investors. The proceeds will be used to slash debt.

It has now announced its first disposal after agreeing to sell Frazer-Nash Consultancy, part of its marine division, to KBR for £293 million in cash. The unit provides engineering services and technology to critical infrastructure in the UK and Australia and employs around 900 people. The business reported £100.5 million in revenue and profit before tax and interest of £13.5 million in the year to the end of March 2021, both having fallen from the year before. It has gross assets worth £79.9 million.

Babcock shares were up 6.2% in early trade this morning at 325.8p, recovering most of the ground it lost since unveiling its plans and annual results in mid-April.

Vectura Group opts for controversial PMI takeover

Vectura Group announced late yesterday that it is recommending the superior takeover offer from tobacco giant Philip Morris International over the rival bid tabled by Carlyle Group.

Carlyle and Philip Morris have been battling it out for the London-listed business, with both companies keen to get its hands on Vectura’s inhaled medicines and devices.

This week, bids were made final by both bidders. Carlyle said its 155p offer was final and wouldn’t be raised again. That was despite the fact PMI tabled a final bid 165p.

Vectura shares were up 0.6% in early trade this morning at 164.2p.

Carlyle took a risk by having a lower final offer, but believed it would be more likely to gain regulatory approval to buy Vectura than PMI, after the London-listed company previously warned of the potential impact on its wider stakeholders if it was bought by a tobacco giant.

The concerns with the PMI bid lie with the idea that a tobacco company can also own the medicines produced to treat the harms caused by its own products, which Carlyle hoped would go in its favour.

PMI has said it wants to operate Vectura as an autonomous business to help it push its ‘Beyond Nicotine’ plan to move into the broader health and wellness space.

Late yesterday, torn between a less provocative but also less valuable deal from Carlyle and a higher but more controversial offer from PMI, Vectura said it had decided to recommend the takeover offer from PMI.

Vectura said the decision came down to value. PMI’s offer is 6.5% higher than the Carlyle offer and adds an extra £1.1 billion in value to the business.

That means it will also scrap the proposed shareholder meetings to vote on the Carlyle deal, leaving it down to shareholders to vote only on the PMI deal.

Still, there is a risk of outside influence stepping in. The CEO of Asthma UK and the British Lung Foundation, Sarah Woolnough, said the proposed tie-up between Vectura and PMI was ‘unacceptable’.

‘Along with representatives from more than 20 organisations, I wrote to the Vectura board today to urge them to reject the bid. They've decided to recommend, so now it's over to the shareholders,’ she told Sky News. Meanwhile, Labour’s Jonathan Ashworth said ‘Philip Morris's attempted takeover of a key player in lung health products beggars belief.’

‘This is now a test for (health secretary) Sajid Javid. When we know smoking causes so much serious illness and premature death, it's time this government takes the right course, stands up to this tobacco giant and blocks this takeover,’ Ashworth said.

Higher coal prices to pave way for Thungela’s dividend plans

Thungela Resources said revenue rose six-fold during the first half of 2021 and escaped the red thanks to higher thermal coal export prices, adding it was already cash positive and on target just one month after becoming an independent company.

The company, which produces thermal coal in South Africa and exported around the world, was spun-off from Anglo American back in June, with a primary listing in Johannesburg and a standard listing in London.

Releasing its first earnings since going public, Thungela revealed revenue jumped to ZAR10,046 million from just ZAR1,657 million the year before. Operating profit soared to ZAR990 million from just ZAR52 million.

Profit at the bottom-line of ZAR351 million swung from a ZAR122 million loss the year before.

Thermal coal prices have improved this year, with the South African thermal coal export price having climbed to its highest level since 2011.

‘After a month of operating as a standalone business, we are cash positive and well positioned to deliver on our targets. We are pleased to note the recent recovery of global thermal coal prices. These are reflective of the continued demand for high quality coal amid challenging supply dynamics across many regions,’ said chief executive July Ndlovu.

Thungela said it plans to produce 15 to 16 million tonnes of exportable coal over the full year and said the continuation of higher prices should allow it to generate positive adjusted operating cashflow for the rest of 2021, which will open up Thungela’s dividend plans.

‘Our strong balance sheet coupled with the above paves the way for Thungela to consider the declaration of a maiden dividend at the annual results for 2021, in line with Thungela's stated dividend policy of a minimum pay-out of 30% of Adjusted operating free cash flow,’ said the miner.

Thungela also stressed it is focused on running fatality-free operations after losing a colleague, Moeketsi Mabatla, at its Goedehoop colliery during June.

Thungela shares were trading 2.3% higher this morning at 234.65p, hovering near all-time highs.

McColl’s Retail Group raises £30 million to fuel strategy

McColl’s Retail Group has completed a large and discounted placing that has significantly diluted existing investors in order to raise cash to help fuel its strategy.

The convenience store chain said it has completed a placing of 150 million new shares at 20 pence each to raise the £30 million it targeted in order to accelerate the conversion of its stores to Morrisons Daily outlets, improve the infrastructure for those stores by refitting them and expanding chilled produce sections, and invest in the wider estate of stores, including possibly accelerating the conversion of more McColl’s stores going forward.

McColl’s plans to have 350 Morrisons Daily stores on its books by the end of November 2022 compared to just 56 at present.

McColl’s directors bought just under 16 million of the placing shares for around £3.2 million.

The placing is significant. It was priced at a 31% discount to the closing share price on August 11, the day before speculation built about an equity raise, of 29p. The amount raised is also large considering McColl’s only boasted a market cap of around £40 million before unveiling its plans.

News of the equity raise sent shares considerably lower. McColl’s shares closed at just 21.50p yesterday, giving it a market cap of just £24.8 million. This morning, the news sent 3.2% lower to 21.3p.

It also issued more placing shares than it had in issue, meaning the new placing shares now account for 56.5% of McColl’s total issued share capital post-placing. That will have significantly diluted existing investors.

‘Today's successful capital raise represents a transformational opportunity to accelerate our strategy and capitalise on the growth opportunity available to us in food-led convenience. On behalf of the board, I would like to thank our existing shareholders for their ongoing support and welcome all new shareholders in the company,’ said chief executive Jonathan Miller.

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