I think this beaten-down UK share could be a great buy for my investment portfolio. And particularly so as the world economy lurches towards trouble.
Even as recession approaches, countries will continue to invest in their armed forces. Spain’s £500m order for 20 new Eurofighter planes from BAE Systems in recent weeks illustrates the point. Nations will always spend heavily to protect their borders at all stages of the economic cycle.
Global defence expenditure rose to record annual levels in 2021, and Russia’s invasion of Ukraine since then has raised the appetite for governments to keep spending. This is why I’d consider snapping up Avon Protection (LSE: AVON) shares today.
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Demand outlook has improved
This particular UK defence share manufactures body armour and masks that armies, security services and police forces use all over the globe.
Back in May it announced that “there has been a significant increase in expression of interest in our products” following the outbreak of the Ukraine war. It added that it expects to see “a significant shift in demand in the short, medium and longer term.”
I like Avon because of its strong relationship with the US Department of Defense that provides exceptional revenues opportunities. This has been helped in part by its acquisition of 3M’s advanced ballistic protection business in 2019.
Risks to Avon Protection
I’m concerned by the large amount of debt Avon Protection currently has on its books. Net debt jumped to $88.3m as of April from $44.1m a year earlier. The business has been forced to curtail research and development spending because of this.
Trading at Avon has also recently been impacted by bumpy US federal budget discussions this year, an issue that has hit orders. Contract delays are a common problem for defence businesses that can have big consequences for near-term investor returns.
A dirt-cheap UK share
That said, the latter point isn’t a dealbreaker for me. I buy UK shares based on the returns I can expect to make over the long term. We’re talking about a minimum of 10 years and above.
And over this sort of timescale I think Avon Protection could deliver exceptional shareholder profits as the geopolitical landscape evolves.
The threat of a new Cold War isn’t the only likely driver of defence spending this decade. According to the Stockholm International Peace Research Institute, China spent 4.7% more on weapons year-on-year in 2021. Russian spending also climbed 2.9% last year.
In the more immediate future City analysts think the business will see earnings tank 67% in this financial year (to September 2022). But they reckon profits will rebound 250%+ next year. This means Avon trades on a rock-bottom price-to-earnings growth (PEG) ratio of 0.1 for fiscal 2023.
At current levels around £10 I think this beaten-down business could be a steal. I expect the defence giant to recover strongly from recent heavy share price weakness.
