Resetting the bar
Carclo is a leading global designer and contract manufacturer (FY17 sales 70% non-UK) of fine tolerance and often mission critical components for the medical (46%), optics (5%), aerospace (5%) and luxury/supercar (27%) markets.Although clearly disappointing, we think today’s update of a ‘near-perfect storm’ should not be viewed as materially damaging to Carclo’s longer term prospects. Here, underpinned by the positive secular tailwinds of rising healthcare spend and increasing model fragmentation within the high-performance car market. In fact, the Board is still hopeful of signing all 5 of these contracts in due course.
What’s more, several self-help measures have been kicked-off in order to improve existing profit margins, especially within Technical Plastics (TP) - with cash continuing to be tightly controlled. Indeed, in terms of the balance sheet the group is “operating well within its banking covenantsâ€, with net debt expected to end March at £33m, equivalent to a comfortable 2x EBITDA (vs 1.5x LY).
Separately, and after 14 years as Group Finance Director, Robert Brooksbank has decided to move on at the end of March to pursue other career opportunities. Similarly, Chairman Michael Derbyshire has chosen to step down at July’s AGM and will be replaced by non-exec Mark Rollins. Current Financial Controller, Richard Ottaway, will become interim CFO from 1st April until a permanent successor is appointed.
With regards to the numbers, we have cut our FY18 and FY19 PBT forecasts to £9.0m (vs £12.4m before and £11m LY) and £11.0m, respectively, which in turn has pushed our valuation down from 206p to 145p/share. That said, we still anticipate the final dividend will be reinstated next year, albeit at a lower level of 1.0p (vs 1.5p). Even at the last closing price of 125p, we continue to see the stock as lowly rated, trading on 11.5x EV/EBIT and 13.4x PER multiples; or 20%-40% discounts compared to peer averages.
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