No Pain, No Gain: Gas mask business will prove to be Avon's calling

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The Independent Online

It is two years since the no pain, no gain portfolio recruited Avon Rubber. Although the shares have yet to justify my faith, I remain hopeful they will eventually produce the sort of display achieved by my high flyers, such as the cider maker Merrydown.

It is two years since the no pain, no gain portfolio recruited Avon Rubber. Although the shares have yet to justify my faith, I remain hopeful they will eventually produce the sort of display achieved by my high flyers, such as the cider maker Merrydown.

As I have remarked on a number of occasions, timing is crucial when making investment decisions. And it would appear I alighted on Avon a little prematurely. I should have waited until a signalled US order was much nearer signature. Still the shares, although at one time slipping into the red, are showing a modest profit and the company, on the trading front, has performed moderately well in a difficult environment.

Once famed as a tyre maker, Avon is now largely known for supplying automotive components. It was, however, its technical products division - and its involvement in gas masks - which attracted me. There is no doubt it is a well-run company. But no matter how excellent the management, its components side is a hostage to the volatile fortunes of the car industry. Not so most of its technical products, especially those gas masks.

It was a possible deal with the US Defence Department that alerted me to the group's potential. The stockbroker Collins Stewart said at the time: "Avon is a large automotive components maker with a small gas mask activity. Over three to five years it will become a large gas mask business with a small automotive activity, and that will not be because the automotive business is getting any smaller."

Well, two years down the road the Collins Stewart forecast remains on target. But any profits from the US gas mask venture are unlikely to bounce Avon's way for some time: indeed, there is little chance of any materialising before 2006. The group has, in preparation for anticipated US demand, established a gas mask factory in Michigan, and it has been selected as "prime contractor" for a US military order for up to three million gas masks over a period of up to 10 years.

Whether the order will be spread equally over the 10 years remains to be seen. Avon could find itself supplying the equipment over a much shorter period, which would have an explosive impact on its profits. Even if spread over the full 10 years, the US contract - thought to offer high margins - should still have a major influence on profits. In addition the group, already the world's leading maker of biological and chemical protective masks, should enjoy a spin-off from the US deal. Transatlantic firemen and other emergency workers could be interested. Demand could also come from private individuals.

But the US is only one of many markets where Avon gas masks save lives. It already ships respirators to many other countries and is said to have supplied our own Army with every gas mask used since the First World War.

Avon's shares are now 206p, capitalising the company at £57.3m, against my 194.5p buying price. They have been as low as 110p since I climbed aboard. The shares drew little strength from the recent interim figures that, like so many company results these days, managed to confuse me (and I gather I was not the only one). On the surface turnover and pre-tax profits were down. But according to Steve Willcox, the chief executive, talking to Tom Winnifrith on the website t1ps.com, sales and profits were actually higher, with profits some £500,000 better than the £4.5m reported. Exchange rates were a factor in the apparent discrepancy.

With its far-flung operations, currency fluctuations will continue to impact the group's performance. Some commentators are nursing hopes that profits this year will nudge £10m. Tipster Tom is shooting for £9.3m. The group has a progressive dividend policy and a year's total of 9p seems likely. Even without the possibilities of the US order the shares are on an undemanding rating, and I am happy to sit with them until we see the rewards of the company's brave US respirator commitment.

On Monday Merrydown, the cider maker that has scored a tremendous success with its Shloer adult soft drink, is due to produce its year's results. Once again Shloer is expected to provide much of the profits sparkle with cider, perhaps, making modest headway. The stock market is looking for around £1.7m against £1.4m last time. Although the shares have displayed a little weakness ahead of the figures I am happy to sit with them. They are, at the time of writing, 93p against my 35.5p buying price.

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