[SharePad] Screening For My Next Long-Term Winner: Avon Rubber

2 thoughts on “[SharePad] Screening For My Next Long-Term Winner: Avon Rubber”

1. hi Maynard

   I enjoyed reading your review of AVON, a very messy one for you to review with all the ongoing changes (disposals, acquisitions, contract delays, optimistic forecasts, confusions with change from £’s to $’s etc).

   One additional point of interest which you didn’t touch on was the Defined Benefits Pension Fund deficit (rather topical given your recent review of Norcross). You may have considered this rather small beer in relation to everything else going on here but there do appear some issues of concern.

   The scheme deficit has increased over the past 3 years (£40.5m / £54.1m / £62.5m).

   Scheme asset values have increased from £316m to £350m but the mix of investments includes an unusually high proportion of equity investments resulting in a profit of £40m in 2019 and a loss of £9m in 2020.

   Annual benefits paid in both 2019 and 2020 were £17m. Investment income plus company agreed deficit funding contributions came to £10m (2019) and £8m (2020) thus covering only around half of the annual benefits due.

   In addition the company paid a one off £20m contribution in 2020 from the proceeds of the sale of a subsidiary (balance used to purchase Team Wendy). Without this the scheme assets would be £20m less and the deficit £20m more at £83m set against adjusted 2020 profits of £30m.

   Assuming the agreed company contribution remains at £1.8m the scheme need to earn a yield of 4.4% (unlikely) on assets of £350m to cover the shortfall in benefits due of £17m.

   I accept there are a lot of moving parts and we are yet to see the benefit of full year contributions from recent acquisitions which should produce an improved position. However, the pension deficit still looks likely to remain sizeable in relation to profitability in the absence of increased company contributions.

   Given your stated views on defined benefit pension schemes I am wondering if this would be a sufficient red flag to deter you from investing in AVON?

   As always your views would be much appreciated.

   Peter

   ps Disclosure – I own AVON shares

   Reply

   • Hi Peter

     Thanks for the comment. Must admit I overlooked the pension situation at AVON. Probably too distracted by everything else going on within the accounts!

     Situation does not look great. Five-year summary below:

     

     Exclude the £20m one-off contribution, and income of £42.1m plus contributions of £6.5m are £36.5m short of the £85.1m benefits paid.

     To get to the BT/BAE-type footing, AVON ought to have pumped a further £7.3m a year into the scheme. Such a sum is not insignificant when 2020 adjusted operating profit was £30m.

     I note the scheme’s annual income has dropped considerably since 2016, which is not ideal.

     Seems as if AVON switched an aggregate £100m from equities, its LDI and cash into two funds last year:

     

     

I presume these funds are biased towards income, but the small-print does not make that clear:

     “The Secured Income fund and Infrastructure fund are classified as level 3 within the fair value hierarchy. Holdings in the secured income fund is valued at fair value which is typically the Net Asset Value provided by the fund administrator at the most recent quarter end. Holdings in the infrastructure fund are valued by an independent valuer using a model-based valuation such as a discounted cash flow approach. The significant assumptions used in the valuation are the discount rate and the expected cash flows.”

     All told the pension situation is a negative for me and adds to the concerns I expressed within the SharePad article.

     Maynard

     Reply