Interactive Investor

Avon Rubber and Softcat boom with Covid-proof models

19th August 2020 13:13

Graeme Evans from interactive investor


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These two stocks are soaring during the pandemic and proving a safe haven for FTSE 250 investors.

High-flying Avon Rubber (LSE:AVON) and Softcat (LSE:SCT) today reminded FTSE 250 index investors why they have been heavily backed to survive - and thrive - despite the Covid-19 pandemic.

Shares in Avon, whose respiratory and ballistic protection systems are used by the world's militaries and emergency responders, have risen more than 70% this year to record highs.

IT infrastructure firm Softcat has also been trading at an all-time high on the back of continued strong demand from public sector organisations and corporates concerned about cyber security or the need to embrace cloud-based solutions.

Marlow-based Softcat's shares rose another 2% to 1,357p today and have now jumped 56% since March after it revealed that results for the year to last month will be slightly ahead of board expectations.

Cash generation has remained strong, meaning Softcat will be able to resume its normal dividend policy and pay the interim award cancelled in March due to the pandemic.

The group, which is on track to extend its 14 year‐long sequence of organic growth, has already returned around £200 million to shareholders since it joined the stock market in 2015.

The update was well received in the City, with Jefferies maintaining its ‘buy’ recommendation and price target of 1,440p. The bank added:

“Despite an uncertain near-term outlook we view Softcat as a standout performer with the company likely to continue growing earnings through the cycle.”

Analysts at Stifel agree: “Softcat has weathered the Covid storm fairly well so far, highlighting the continuing value of core infrastructure providers in times of accelerating digital transformation.”

But with Softcat shares trading at a near-record high, and on a multiple of 32 times 2021 earnings, Numis Securities cautioned that a fresh catalyst was now needed for the stock to kick on.

The company is worth £2.6 billion, which compares with £2.2 billion for its older and more established FTSE 250 rival, Computacenter (LSE:CCC). Softcat was one of 32 stocks named by Peel Hunt in April as the most likely to emerge from the pandemic with stronger market positions.

The list also included Avon Rubber, which has certainly delivered on its potential after its shares produced one of the strongest performance in the FTSE 350 index so far this year.

The maker of masks and personal protection systems rose another 4% to 3,560p today after the award of a 10-year contract by the NATO Support & Procurement Agency to supply FM50 mask systems, powered and supplied air systems, filters, spare parts and accessories.

No figures on the value of the contract were given, but the first order will be received shortly and initial deliveries should contribute to 2021 revenues.

Jefferies called it a “very important contract win” and one that will underpin the company's medium and longer-term financial guidance. Peel Hunt reiterated its ‘buy’ recommendation and price target of 4,200p, noting that shares are trading on a price/earnings multiple of 33x for 2021 before falling to 30x for 2022.

The company is now focused on its Avon Protection division after a recent £180 million deal to sell its other operation providing milking solutions to dairy farmers. The disposal will enable a one-off contribution of £20 million to strengthen the company's UK pension scheme, as well as boost the balance sheet for further acquisitions to grow the Avon Protection business.

Avon Rubber is now worth more than £1 billion, having seen shares hit a record high of 3,765p in mid-July. They had been at 1,650p in August last year.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Related Categories

    UK shares
    Cyber security

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