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Research: TMT
Carclo
Written by
Carclo |
Trading well but bond yields affecting dividend |
Update on trading |
Tech hardware & equipment |
1 September 2016 |
Share price performance
Business description
Next events
Analysts
Carclo is a research client of Edison Investment Research Limited |
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The two divisions driving growth – Technical Plastics and LED Technologies – are both performing well and in line with management expectations, so we leave our earnings estimates unchanged. However, low corporate bond rates have resulted in a significant increase in the pension deficit, meaning that management may not be able to use the profit growth to fund Carclo’s progressive dividend policy. As the dividend suspension does not reflect any issues with profits growth, we reiterate our earnings estimates, which look for 15% adjusted PBT growth in FY17.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/15 |
107.5 |
7.1 |
7.9 |
2.8 |
16.5 |
2.2 |
03/16 |
119.0 |
8.8 |
10.1 |
0.9 |
12.9 |
0.7 |
03/17e |
124.3 |
10.1 |
11.2 |
0.0 |
11.6 |
N/A |
03/18e |
134.9 |
11.5 |
12.7 |
0.0 |
10.2 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Operating divisions trading well
Both the larger divisions have started FY17 well. Demand from the Technical Plastics healthcare customers was as expected. News of additional production volume for non-healthcare work and additional healthcare projects in China is encouraging, although not incremental to our estimates. The automotive programmes, including the one for a medium-volume vehicle, are progressing as planned. The Optics business has experienced strong demand. All these factors give increased confidence in our estimate of 15% adjusted PBT growth for FY17.
Bond issues affect dividend payments
Given this positive trading situation, profit generation easily outstrips management’s planned 3% increase in the dividend pay-out during FY17. However, the collapse of corporate bond rates post the EU membership referendum has led to an increase in the probable IAS 19 pension deficit, which will eliminate the distributable reserves. If this situation continues, management is legally prevented from paying a final dividend for FY16 or future periods. We adjust the FY16 dividend payment from 2.9p/share to 0.9p (the interim dividend payment) and our FY17 and FY18 DPS estimates from 3.0p and 3.1p respectively to zero.
Valuation: Earnings generation not affected
The share price has fallen by 17% since the news, probably reflecting the reaction of some investors who seek dividends. We note, however, that the dividend yield, had management been able to proceed with its progressive dividend policy, would only have been 2.2%. The attraction of this stock, in our opinion, is the potential for earnings growth, which is not impaired by the news of dividend suspension. The two key divisions continue to grow as expected. Management has stated that it is not intending to make any additional payments to the pension scheme to cover the current actuarial deficit.
Financial summary
Exhibit 1: Financial summary
Year end 31 March |
£000s |
2015 |
2016 |
2017e |
2018e |
|
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||
Revenue |
|
|
107,503 |
118,974 |
124,334 |
134,917 |
Cost of Sales |
0 |
0 |
0 |
0 |
||
EBITDA |
|
|
11,402 |
13,840 |
16,018 |
17,383 |
Operating Profit (before amort. and except.) |
7,789 |
10,034 |
11,818 |
13,183 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals |
(31,668) |
(4,857) |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Operating Profit |
(23,879) |
5,177 |
11,818 |
13,183 |
||
Net Interest |
(666) |
(1,282) |
(1,700) |
(1,700) |
||
Profit Before Tax (norm) |
|
|
7,123 |
8,752 |
10,118 |
11,483 |
Profit Before Tax (FRS 3) |
|
|
(24,545) |
3,895 |
10,118 |
11,483 |
Tax |
1,772 |
(1,708) |
(2,732) |
(3,100) |
||
Profit After Tax (norm) |
6,068 |
6,687 |
7,386 |
8,382 |
||
Profit After Tax (FRS 3) |
(22,773) |
2,187 |
7,386 |
8,382 |
||
Average Number of Shares Outstanding (m) |
66.2 |
66.2 |
66.2 |
66.2 |
||
EPS - normalised (p) |
|
|
7.9 |
10.1 |
11.2 |
12.7 |
EPS - normalised fully diluted (p) |
|
|
7.9 |
10.1 |
11.1 |
12.7 |
EPS - (IFRS) (p) |
|
|
(33.2) |
3.3 |
11.2 |
12.7 |
Dividend per share (p) |
2.8 |
0.9 |
0.0 |
0.0 |
||
EBITDA Margin (%) |
10.6 |
11.6 |
12.9 |
12.9 |
||
Operating Margin (before GW and except.) (%) |
7.2 |
8.4 |
9.5 |
9.8 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
66,065 |
66,660 |
69,160 |
71,660 |
Intangible Assets |
26,000 |
20,257 |
20,957 |
21,657 |
||
Tangible Assets |
31,721 |
36,597 |
38,397 |
40,197 |
||
Investments |
8,344 |
9,806 |
9,806 |
9,806 |
||
Current Assets |
|
|
49,362 |
59,635 |
62,853 |
69,003 |
Stocks |
13,440 |
15,596 |
16,351 |
17,743 |
||
Debtors |
24,367 |
26,647 |
28,614 |
31,419 |
||
Cash |
10,855 |
16,692 |
17,188 |
19,142 |
||
Other |
700 |
700 |
700 |
700 |
||
Current Liabilities |
|
|
(27,515) |
(33,428) |
(33,856) |
(35,623) |
Creditors |
(21,802) |
(22,732) |
(23,160) |
(24,927) |
||
Short term borrowings |
(5,713) |
(10,696) |
(10,696) |
(10,696) |
||
Long Term Liabilities |
|
|
(46,559) |
(60,000) |
(61,000) |
(61,000) |
Long term borrowings |
(29,660) |
(30,746) |
(31,746) |
(31,746) |
||
Other long term liabilities |
(16,899) |
(29,254) |
(29,254) |
(29,254) |
||
Net Assets |
|
|
41,353 |
32,867 |
37,157 |
44,040 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
3,549 |
13,933 |
13,524 |
14,754 |
Net Interest |
(650) |
(877) |
(2,200) |
(2,200) |
||
Tax |
(712) |
(1,253) |
(2,732) |
(3,100) |
||
Capex |
(7,912) |
(9,577) |
(7,500) |
(7,500) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
103 |
20 |
(1,000) |
0 |
||
Dividends |
(1,752) |
(1,821) |
(596) |
0 |
||
Net Cash Flow |
(7,374) |
425 |
(504) |
1,953 |
||
Opening net debt/(cash) |
|
|
17,680 |
24,518 |
24,750 |
25,254 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
536 |
(657) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
24,518 |
24,750 |
25,254 |
23,300 |
Source: Carclo accounts, Edison Investment Research
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