Carclo plc: High growth stock trading >30% below SOTP valuation
Carclo is a leading global designer and contract manufacturer (FY17 sales 70% non-UK) of fine tolerance and often mission/safety critical components for the medical (46%), optics (5%), aerospace (5%) and luxury/supercar (27%) markets. Carclo has shown that you don’t have to be a ‘Silicon Valley’ tech start-up to deliver double-digit top line growth, as the group has been doing exactly this for years.Its strategy of dove-tailing front-end innovative design, prototyping and tooling capability, with back-end flexible manufacturing, global coverage and supply chain expertise, is proving a winning formula. In turn, helping to propel FY17 revenues to £138.3m (+16.2%, or 10% constant currency), EPS up 20% (12.1p) and EBIT margins to 9.0% (vs 8.4% LY).
Better still, the vast majority of these volumes are tied to OEM platforms with typical life-spans of between 5-20 years. Hence providing excellent forward visibility and predictable earnings. We think the momentum (12.4% pa sales CAGR) built up over the past 4 years should continue - underpinned by the production of long-cycle end-user products, low client churn and secular growth.
Our forecast revenues are set to expand at a 10% pa clip over the next 4 years, and even accelerate slightly once Wipac’s new mid-volume LED contracts come on stream from late 2019 onwards. EPS is predicted to jump 68% from 12.1p in FY17 to 20.3p by FY21, on turnover up 46% from £138.3m to £202.5m.
Encouragingly for income seekers, the Board recognises the importance of sustainable and progressive dividends. After a suspension due to pension considerations affecting distributable reserves, the resumption of payments has been pencilled in for 12 months’ time.
The stock at 152p appears lowly rated, trading on PER and EV/EBIT multiples of 11.9x and 9.8x respectively vs peer averages of >20x and c. 16x-17x.We calculate there is >30% disparity versus our 200p/share sum-of-the-parts valuation.
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