Insider: recovery buying at ex-FTSE 250 firm and Naked Wines

Shares in this former mid-cap have lost 75% of their value in two years, but the boss thinks it has a “significant long-term growth opportunity”.

A bullish Avon Protection (LSE:AVON) boss Bruce Thompson has backed up his confidence in the defence firm’s recovery prospects by splashing another £52,000 on shares.

The chairman, who is running operations until next month’s arrival of a new chief executive, told investors recently that Avon had a “significant long-term growth opportunity” and that demand for its respiratory and head protection systems was as strong as ever.

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The heightened threat environment has boosted stocks across the defence sector, but in Avon’s case its shares are below where they started the year. They closed last week at 1,064p, having been 1,158p on the day Thompson made his comments alongside annual results.

Thompson, who is the former boss of FTSE 250-listed technical products business Diploma, bought his latest tranche of shares on Wednesday at a price of 1,055p.

He also made a £50,000 investment at 1,008p in February, with these prices significantly below his maiden purchase in September 2020 of 4,164p and 3,060p three months later. This was when the company was known as Avon Rubber and riding high in the FTSE 250 index.

The stock hit reverse in 2021 after the disclosure of a product testing failure and subsequent disbanding of its body armour division. The sale of these US assets was announced last week, but completion is not due until all contractual obligations have been met next year.

Supply chain issues have also had a big impact on Avon, with lead times for some components extended from the usual six weeks to closer to 40 weeks.

The margin in recent full-year results fell to 9.4% from 15.1% the year before, but  a second-half figure of 12.9% has boosted confidence as Avon works towards a target to reduce overheads by $21 million (£17.1 million) a year.

Avon’s 20-year relationship with the US Department of Defense has been unaffected by the recent body armour issues while an order book worth $151.3 million (£123.2 million) offers “good visibility” amid the dynamic-demand environment.

In addition, Avon has so far delivered over 65,000 of its respirators on behalf of various Nato governments for use in Ukraine.

Thompson said: “We have made good progress in 2022 preparing for a new chapter of growth and future value generation, including restructuring some areas of the business and resolving legacy execution issues.”

He added that last March’s arrival of Rich Cashin as chief financial officer and the appointment of Jos Sclater as chief executive from 16 January brought a “wealth of experience and impressive track records” from the aerospace and defence sector.

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Broker Peel Hunt recently reiterated its “buy” recommendation and target price of 1,400p, having forecast that demand levels and profitability will return to more normalised levels after the current financial year.

Analysts at Jefferies added: “After a tricky period, Avon is rebuilding and we await a new CEO in January, but the group's fundamentals are sound and outlook attractive.”

Backing the booze business

The top two executives at Naked Wines (LSE:WINE) have backed the company’s reshaped strategy by spending £45,000 on its AIM-listed shares.

Chief executive Nick Devlin bought 25,000 shares at just over 100p, while James Crawford picked up 20,000 at 97.6p on his first day as chief financial officer.

The investments were made after results showed a 4% rise in half-year revenues to £165.8 million and bottom-line loss of £200,000. Net cash declined 60% to £22.9 million.

The business has doubled in size since the pandemic, but Devlin said 2022 had been one of the most difficult years in the company’s history. He added: “The operating environment across all our markets has been tough - with multiple factors placing significant pressure on all e-commerce businesses.”

These conditions led to a rethink of the company’s strategy, resulting in October’s plan to focus on higher profitability and ultimately cash generation over the next two years.

This will mean a reduced sales trajectory over coming periods, but the company has been encouraged by a customer retention rate that remains unchanged on pre-pandemic levels as well as its success in realising price uplifts and improving payback levels.

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US bank Jefferies, which has a price target of 175p, is now more optimistic after the company renegotiated the growth-related covenant on its credit facility that had been responsible for the “material uncertainty” reference in earlier annual results.

It added: “We expect 2023 to mark the cash trough as Naked works through its elevated inventory position, before returning to strong cash generation in 2024.”