On Friday, Barclays initiated coverage on Avon Protection PLC (LSE:AVON) (OTC:AVNBF) with an Equalweight rating and a price target set at £14.00. The firm highlighted Avon's potential for substantial earnings per share (EPS) and free cash flow (FCF) growth, driven by operational gearing and cost reduction activities. Avon is expected to outperform its European defense peers, with an estimated compound annual growth rate (CAGR) for EPS/FCF of around 35% for the fiscal years 2024 to 2026, compared to the peer average of 16% and roughly 35%, respectively.
Barclays pointed out that the anticipated growth in EPS is supported by an expected margin expansion of approximately 300 basis points from 2024 to 2026. This expansion is likely due to increased operational leverage in head protection, rationalization of the respiratory protection footprint, benefits from intra-state wage arbitrage and lower taxes, as well as reduced interest costs from a strategic focus on debt reduction.
Despite the positive outlook for operational performance, Barclays noted that Avon's current valuation already reflects the anticipated growth. The stock has shown a year-to-date increase of 55% in its share price, outperforming the FTSE 100 index, which has seen a rise of 6%. Consequently, Avon's shares are trading at a substantial premium compared to both relative and absolute valuation metrics.
The firm's analysis suggests that while Avon's fundamentals are attractive within the sector, the market has already priced in much of the growth potential. Avon's focus on margin improvement and operational efficiency is expected to be a key driver for its performance in the coming years, as outlined by the firm's coverage initiation. The price target of £14.00 reflects Barclays' assessment of Avon's value in light of these factors.
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