Most firms are posting falling revenues and profits at the moment. This is because economic conditions are extremely tough. As such, many UK investors are looking to growth companies as the best London Stock Exchange shares to buy now.
While I’m convinced some battered cheap UK shares are worth investing in, I also think strong growth stocks belong in a portfolio. With this in mind, here’s a FTSE 250 high-flier I’m currently very keen on.
A reason this stock is on my list of best shares to buy now
Avon Rubber (LSE: AVON) is on the brink of a strategic transformation. Until now, it’s been home to two distinct businesses.
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The first (Avon Protection) operates in the defence sector and is the bigger of the two. It generated 72% of the group’s revenue last year. The second (milkrite | InterPuls) is an agricultural technology business. It provides milking solutions to dairy farmers across the world.
In July, Avon announced it had agreed to sell milkrite | InterPuls to Swedish dairy giant DeLaval. The deal is expected to complete on 25 September. I think it’s a great strategic move, because it’ll leave management focused solely on the company’s attractive defence business.
Strong organic growth
Avon Protection is “a world leader in respiratory and ballistic protection, delivering life critical solutions for Militaries and First Responders.”
In Avon’s latest results, the division posted strong organic growth. Revenue increased 10%. Moreover, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) increased 34%.
Subsequently, new contract wins from NATO and the US Department of Defense bode well for continuing organic growth. This is a second reason I’d buy the shares today. Meanwhile, I’m particularly excited by a development announced just last week.
A third reason Avon is one of my best shares to buy now
Avon has signed an agreement to acquire US firm Team Wendy. It’s a leading supplier of helmets, and liner systems, for military and first-responder markets. The deal’s set to complete in the first quarter of Avon’s financial year (October-December).
Management has described it as a “compelling… redeployment of capital into a highly complementary business with higher growth and margins and at a lower EBITDA multiple than obtained for milkrite | InterPuls.“
I think it’s a very canny bit of business by Avon. You can see this from the table below in which I’ve put key numbers of the sale and acquisition.
|
|
milkrite | InterPuls sale |
Team Wendy acquisition |
|
Price |
£180m |
$130m (£100m) |
|
Sales |
£50.9m |
$44.2m (£34m) |
|
EBITDA |
£10.5m |
$13.4m (£10.3m) |
|
EBITDA margin |
20.6% |
30.3% |
|
Price/Sales |
3.5x |
2.9x |
|
Price/EBITDA |
17.1x |
9.7x |
Shareholders have to approve the acquisition at a meeting on 28 September. I’m confident they will, because it’s clearly value-enhancing.
Valuation seals the deal
Taking account of the milkrite | InterPuls disposal, the Team Wendy acquisition, and another acquisition back in January, my sums give a pro forma EBITDA in excess of £50m for Avon’s current financial year (ending 30 September).
I put the Enterprise Value/EBITDA multiple at around 24, falling to sub-20 for fiscal 2021. The latter is based on £65m EBITDA I think’s reasonable from organic growth and acquisition synergies. If I’m right, the rating is far from outrageous for a growth stock.
The valuation, management’s shrewd deal-making abilities, and a balance sheet capable of supporting further acquisitions all lead me to rate Avon one of the best growth shares to buy now.
