Recovery postponed

Carclo 23 January 2019 Update
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Carclo

Recovery postponed

Trading update

Tech hardware & equipment

 

23 January 2019

Price

48.45p

Market cap

£36m

Net debt (£m) at 30 September 2018

35.9

Shares in issue

73.4m

Free float

91.8%

Code

CAR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(39.4)

(39.1)

(41.6)

Rel (local)

(41.4)

(37.9)

(34.9)

52-week high/low

121.0p

47.8p

Business description

Carclo is a specialist in high-precision plastic moulding, principally in healthcare, optical and automotive applications. Its two main end-markets are high-volume medical consumables and low-volume, very high-value automotive lighting, typically for supercars.

Next event

FY19 results

4 June 2019

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Carclo is a research client of Edison Investment Research Limited

Carclo has announced that the issues associated with initiating multiple low-volume lighting programmes in parallel that adversely affected H119 have continued throughout Q319. At the interim stage management believed that these issues would be resolved by the end of Q3, supporting a second half recovery, but now expects that second half profit levels will be similar to the first half. We revise our estimates, cutting EPS by 37% in both FY19 and FY20.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

03/17

138.3

11.0

12.1

0.0

4.0

N/A

03/18

146.2

9.1

9.8

0.0

4.9

N/A

03/19e

140.5

6.9

7.1

0.0

6.8

N/A

03/20e

150.1

7.6

7.9

0.0

6.1

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

LED inefficiencies continue into Q319

In H119 divisional profitability was hit by starting all of the new lighting production programmes for the year during the first half. This situation worsened during Q3 as production ramped up. Although action has been taken to bring additional machine capacity on stream and adopt more effective scheduling techniques, these improvements will take time to complete. Additionally, the delays in ramping up production have resulted in delays in the award of new programmes, affecting divisional revenues for H219 and FY20. We note, however, that progress on the key mid-volume programmes, which have dedicated design teams and production cells, has been unaffected, other than a key milestone payment slipping into FY20.

Technical Plastics recovery slower than planned

Following a 1.5pp year-on-year dip in margins in H119, initiatives to improve margins in Technical Plastics have started to deliver results but at a slower rate than management expected at the interims. Consequently, we now expect the second half recovery to result in FY19 divisional profit being similar to the FY18 result rather than generating 11% year-on-year EBIT growth. The smaller Aerospace division continues to perform ahead of management’s expectations.

Valuation: Recovery to drive share price

At group level Carclo, which has a diversified model, is trading on an FY19 P/E of 6.8x, substantially lower than the weighted mean of peers across the medical device manufacturing, automotive and aerospace sectors (12.3x). Newsflow demonstrating that management initiatives are driving margin improvement should help close this gap, with a range of 74–79p (a 10–15% discount to peers) looking justifiable on this basis, with scope for upside as the recovery beds down.

Changes to estimates

We revise our estimates to reflect:

Efficiency issues in the LED division causing some customers to postpone placing new orders for low-volume programmes, thus reducing divisional revenues in H219 and FY20.

Efficiency issues in the LED division adversely affecting margins in H219.

A slower than expected improvement in CTP margins adversely affecting divisional profitability in H219.

Exhibit 1: Revisions to estimates

FY18

FY19e

FY20e

Actual

Old

New

%change

Old

New

%change

CTP revenues (£m)

89.7

88.7

88.7

0.0%

95.6

95.6

0.0%

CTP EBIT (£m)

6.7

7.4

6.7

-9.1%

8.1

7.3

-10.8%

LED revenues (£m)

50.6

51.6

45.5

-11.8%

55.0

48.5

-11.8%

LED EBIT (£m)

6.4

7.8

4.4

-43.3%

8.3

4.7

-43.3%

Aerospace revenues (£m)

6.0

6.3

6.3

0.0%

6.0

6.0

0.0%

Aerospace EBIT (£m)

0.7

0.9

0.9

0.0%

0.7

0.7

0.0%

Group revenues (£m)

146.2

146.6

140.5

-4.1%

156.6

150.1

-4.1%

Group adjusted PBT (£m)

9.1

10.9

6.9

-37.0%

12.1

7.6

-37.1%

Group adjusted EPS (p)

9.8

11.3

7.1

-37.0%

12.5

7.9

-37.1%

Group DPS (p)

0.0

0.0

0.0

0.0%

3.9

0.0

N/A

Source: Edison Investment Research

The statement says that the group year-end net debt position is anticipated to be slightly above the level seen at the half year (£35.9m) due to a delay in receiving a substantial milestone for customer approval for tooling on a mid-volume contract. Hence we increase our year-end net debt to £37.8m from £28.5m previously. Management has stated that it expects group net debt to remain within banking covenants at the newly anticipated profit level, although margin for error has clearly reduced. We leave our capex estimates unchanged for the moment, as investment will be needed in the US ahead of the commencement of production in FY21.

Management has previously noted that it would not reinstate the dividend until it was able to do this in a sustainable manner. We had previously assumed that this would be possible by FY20 but now adopt a more conservative position.

Management changes

CEO Chris Malley has been focused on resolving the production inefficiencies in the LED division for several weeks. On 11 January 2019, he stepped down from his CEO role in order to devote himself full-time to this task. Mark Rollins, who became non-executive chairman in July 2018, has switched to an executive capacity while a replacement full-time CEO is sought.

Valuation

At group level Carclo, which has a diversified model, is trading on an FY19 P/E of 6.8x, substantially lower than the multiples for medical device companies and below those for automotive and aerospace industries (see Exhibit 2).

Given the current issues and earnings momentum, this is understandable and was reflected in the negative share price response to the trading statement. However, in our view it prices in little prospect of a recovery. Action is being taken to rectify the situation in the LED division, while the recovery in Technical Plastics does appear to have started, albeit at a slower rate than previously anticipated.

We believe that newsflow with firm evidence that margin issues are being resolved should be a catalyst for the start of a share price recovery. A valuation of 74–79p (9.4–10.0x FY20 earnings, a 10–15% discount to an undiscounted sum of the parts peer valuation) looks justifiable on this basis. We still see potential for further share price appreciation beyond this as Carclo begins to deliver on the mid-volume automotive lighting programmes and investors can appreciate their impact on the bottom line.

Sum-of-the-parts methodology

We use a sum-of-the-parts approach to determine an indicative FY19e P/E multiple for Carclo, as this methodology acknowledges that around half of its divisional operating profit is attributable to the sale of products to the global healthcare industry. Where available, the P/E multiple applied to each division is the mean for each sector, as shown in Exhibit 3. There are a number of companies manufacturing high-volume medical products but the key one of relevance, which we use in the sum-of-the-parts calculation, is Gerresheimer, as its products are primarily for use in medical/pharmaceutical test facilities, rather than for patient care (Ambu, Coloplast and Straumann). As can be seen from Exhibit 2, the latter trade on much higher multiples and are excluded from our sum-of-the-parts calculations. As shown in Exhibit 3, the weighted average P/E multiple derived from the multiples for the three sectors is 12.3x.

Exhibit 2: Listed peers

Name

Market cap ($m)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

P/E 1FY (x)

P/E 2FY (x)

Carclo @ 47p – current share price

45

4.6

4.2

6.6

6.0

Carclo @ 74p – 15% discount to undiscounted SOTP

70

5.9

5.5

10.4

9.4

Carclo @ 79p – 10% discount to undiscounted SOTP

74

6.1

5.7

11.0

10.0

Healthcare: patient implants and disposables

Ambu A/S

5,235

39.7

29.9

77.6

53.8

Coloplast A/S

18,416

19.2

17.4

30.0

26.9

Straumann Holding AG

10,398

25.5

21.7

35.5

29.1

Healthcare: drug delivery and packaging

Gerresheimer AG

2,151

10.1

10.0

13.0

15.3

Automotive

American Axle & Manufacturing Holdings Inc

1,424

4.1

4.2

3.9

4.2

BorgWarner Inc

8,183

5.8

5.6

9.0

8.5

Freni Brembo SpA

3,962

7.4

7.1

13.0

12.3

Delphi Technologies PLC

1,509

3.9

4.3

4.1

5.1

Faurecia SA

5,590

2.8

2.7

6.7

6.2

Haldex AB

327

6.3

5.7

13.1

11.1

HELLA GmbH & Co KgaA

4,768

3.9

4.1

9.0

9.5

Leoni AG

1,184

4.9

4.7

8.0

7.8

Magna International Inc

16,751

4.8

4.7

5.6

5.3

paragon GmbH & Co KgaA

110

7.0

4.8

16.7

9.4

Valeo SA

7,511

4.3

3.8

9.8

8.1

Visteon Corp

1,897

6.0

6.1

11.7

11.5

Mean

5.1

4.8

10.1

9.0

Aerospace

Facc AG

758

9.9

8.8

19.9

15.9

Latecoere SA

319

7.4

5.6

23.4

19.5

Senior PLC

1,140

7.7

7.1

13.7

12.5

TT electronics PLC

420

8.1

7.0

13.8

11.4

Mean

8.3

7.1

17.7

14.8

Source: Refinitiv, Edison Investment Research. Note: Prices at 14 January 2019. Grey shading indicates exclusion from mean.

To cross-check our valuation, we compare EV/EBITDA multiples implied by our P/E-derived values with a blended sum-of-the-parts EV/EBITDA for the peer group. Our indicative valuation of 74–79p implies a year one EV/EBITDA range of 5.9–6.1x (see Exhibit 2), which is at a discount to the peer group blended year one EV/EBITDA multiple of 8.1x.

Exhibit 3: SOTP calculation

Division

P/E

% FY19e EBIT

EV/EBITDA

CTP

13.0x

56.0%

10.1x

LED

10.1x

36.7%

5.1x

Aerospace

17.7x

7.3%

8.3x

Blended value

12.3x

8.1x

FY19e EPS

7.1p

Undiscounted indicative value

87.4p

Indicative value applying 10% discount

78.7p

Indicative value applying 15% discount

74.3p

Source: Edison Investment Research

Exhibit 4: Financial summary

£000s

2017

2018

2019e

2020e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

138,282

146,214

140,537

150,100

EBITDA

 

 

17,033

15,543

14,483

15,599

Operating Profit (before amort. and except).

12,498

10,811

8,983

9,599

Intangible Amortisation

0

0

0

0

Exceptionals

(541)

(904)

(1,000)

0

Other

0

0

0

0

Operating Profit

11,957

9,907

7,983

9,599

Net Interest

(1,479)

(1,740)

(2,100)

(2,000)

Profit Before Tax (norm)

 

 

11,019

9,071

6,883

7,599

Profit Before Tax (FRS 3)

 

 

10,478

8,167

5,883

7,599

Tax

(2,496)

325

(1,652)

(1,824)

Profit After Tax (norm)

8,418

7,171

5,231

5,775

Profit After Tax (FRS 3)

7,982

8,492

4,231

5,775

Average Number of Shares Outstanding (m)

69.4

73.2

73.4

73.4

EPS – normalised (p)

 

 

12.1

9.8

7.1

7.9

EPS – normalised fully diluted (p)

 

 

12.1

9.8

7.1

7.9

EPS – (IFRS) (p)

 

 

11.5

11.6

5.8

7.9

Dividend per share (p)

0.0

0.0

0.0

0.0

EBITDA Margin (%)

12.3

10.6

10.3

10.4

Operating Margin (before GW and except.) (%)

9.0

7.4

6.4

6.4

BALANCE SHEET

Fixed Assets

 

 

79,464

80,638

84,438

89,938

Intangible Assets

25,702

25,311

25,611

25,911

Tangible Assets

43,423

46,446

49,946

55,146

Investments

10,339

8,881

8,881

8,881

Current Assets

 

 

80,187

79,423

76,535

76,818

Stocks

19,250

19,812

20,792

21,384

Debtors

38,468

46,449

48,899

43,179

Cash

22,269

12,962

6,644

12,055

Other

200

200

200

200

Current Liabilities

 

 

(46,884)

(44,390)

(41,448)

(41,833)

Creditors

(27,996)

(29,205)

(26,263)

(26,648)

Short term borrowings

(18,888)

(15,185)

(15,185)

(15,185)

Long Term Liabilities

 

 

(68,504)

(63,652)

(63,652)

(63,652)

Long term borrowings

(29,406)

(29,253)

(29,253)

(29,253)

Other long term liabilities

(39,098)

(34,399)

(34,399)

(34,399)

Net Assets

 

 

44,263

52,019

55,873

61,271

CASH FLOW

Operating Cash Flow

 

 

8,916

6,257

6,084

20,085

Net Interest

(762)

(917)

(1,000)

(900)

Tax

(2,086)

(1,693)

(1,652)

(1,824)

Capex

(7,683)

(9,075)

(9,500)

(11,700)

Acquisitions/disposals

(5,672)

0

(250)

(250)

Financing

7,616

(248)

0

0

Dividends

(596)

0

0

0

Net Cash Flow

(267)

(5,676)

(6,318)

5,411

Opening net debt/(cash)

 

 

24,750

26,025

31,476

37,794

HP finance leases initiated

0

0

0

0

Other

(1,008)

225

0

0

Closing net debt/(cash)

 

 

26,025

31,476

37,794

32,383

Source: Carclo accounts, Edison Investment Research

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This report has been commissioned by Carclo and prepared and issued by Edison, in consideration of a fee payable by Carclo. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Carclo and prepared and issued by Edison, in consideration of a fee payable by Carclo. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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