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Avon Protection faces challenges with declining shares and failed military gear tests. The company is now taking steps towards financial recovery.

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Embattled Avon Protection (AVON) garners the attention of investors as it embarks on a three-year turnaround plan following a catastrophic share price implosion in late 2021. This downturn resulted from the company’s disclosure that a body armor business it purchased from 3M for $91mn (£73mn) had failed US military ballistic tests. This failure led to an over 80% decrease in Avon’s share value over three years, prompting activist Ancora Alternatives to call for a strategic review in June.

Failed Military Gear Tests Trigger Massive Losses

Triggered by the failed US military ballistic tests, Avon’s shares nosedived, resulting in a significant loss in the company’s market value. While the intervention from Ancora Alternatives wasn’t entirely welcome, Avon’s finance director, Rich Cashin, stated that it made the turnaround process slightly easier.

Despite the challenges, Avon is striving to restore its financial health. The full-year results reveal an adjusted operating profit that was 9% lower at $21.2mn. A $24.6mn writedown in the carrying value of its head protection business, combined with about $3mn of restructuring and transition costs, resulted in a statutory operating loss of £12.6mn.

Restructuring and Cost-Cutting Measures

In response to this financial setback, Avon undertook a series of restructuring and cost-cutting measures. The company formally separated its business into two units, attributing the requisite goodwill to each. This led to an impairment of $24.6mn in the head protection business’s carrying value due to lower revenues and profitability.

Avon has also reduced central overheads and initiated projects to enhance margins and cash conversion by rationalising sites on both sides of the business. However, cash conversion for the year dropped to a mere 7%, which management attributed to the timing of a unique order for a Middle Eastern customer fulfilled at the year-end. Subsequently, net debt rose by $17mn to $85.4mn.

Expected Recovery and Future Outlook

According to FactSet’s consensus forecasts, earnings per share are expected to increase by nearly a quarter in this financial year. Despite this potential gain, Avon’s shares continue to trade at around 19 times earnings. There is a palpable need for more evidence of progress before this rating can be justified.

Avon Protection’s ongoing challenges underscore the risks and volatility inherent in the stock market. However, the company’s proactive measures to overcome its difficulties and improve its financial health reflect an encouraging sign. Although the current economic implications warrant a cautious approach, the potential for recovery could present investment opportunities for those willing to weather the volatility. It is certainly a stock to keep an eye on, given the expected improvement in the EPS. For now, a reasonable approach would be to hold.