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UK shares: why the Avon Rubber share price has crashed 14% today!

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The Avon Rubber (LSE: AVON) share price has been a ray of sunshine for UK share investors in what has been an otherwise dismal 2020. The business — which builds masks and body armour for militaries and security services across the world — is up 55% since last New Year’s Eve.

A series of strong trading updates, contract wins, and the sale of its dairy operations all helped Avon soar.

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But demand for Avon’s shares has slipped considerably in December. Although it closed at all-time highs of £46.25 per share on 1 December, it’s currently changing hands around £32.60. And it collapsed 14% in Thursday trading following the release of fresh trading details.

So what exactly has Avon Rubber said?

Double trouble

Investor appetite for the defence giant’s fallen on the back of two disappointing sets of testing news. Firstly, Avon Rubber reported approval processes relating to two major contracts “have been delayed as a result of a failure encountered in First Article Testing.”

The delays relate to US Defense Logistics Agency Enhanced Small Arms Protective Inserts and US Army Vital Torso Protection body plates.

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These approvals had been expected in the first half of this fiscal year (to September 2021). However, Avon now reckons first deliveries under these contracts won’t begin until the next financial year.

In another whack to market sentiment, Avon Rubber said a protest had been lodged against its US Army Next Generation Integrated Head Protection System sole source contract. The FTSE 250 firm said that although the subsequent delay created by this protest is “unwelcome,” it “is not currently expected to have any material impact” on expectations for the current financial year.

Avon Rubber’s forecasts to be downgraded

The remainder of Avon’s Thursday statement wasn’t quite as disappointing. The defence company said trading during the first quarter has been in line with expectations. It has experienced “good order intake” too, it said.

Avon added that while the aforementioned contract issues will harm performance in fiscal 2021, it said it “remains confident” in hitting its medium-term targets “given the momentum we are seeing across the business.”

The frantic selling of Avon’s shares began after the release of full-year results on 2 December. However, this fresh exodus was prompted by strong profit taking. Unsurprising after the UK share’s stratospheric share price gains since the beginning of the year.

In fact, that statement for fiscal 2020 also showed a 9% improvement in adjusted pre-tax profits. It also highlighted a huge jump in its closing order book, and a 30% rise in the total dividend.

City analysts had expected Avon Rubber’s annual earnings to soar by around two-thirds in this fiscal year before Thursday’s update. A 64% increase had been anticipated, leaving the company trading on a forward price-to-earnings (P/E) ratio of around 25 times. Though those forecasts are in line for noticeable downgrades following today’s unfortunate release.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Avon Rubber. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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