Technical Plastics had a solid first half with revenue growth of 4.9% vs H115, feeding into an operating profit improvement of 11.5%. Revenue progress was made in the UK, US, Czech Republic and India. Production in the new Chinese facility is on schedule to start in January 2016 and management continues to report strong interest from potentially significant international customers, along with the existing major US customer. Further expansion is planned for the facilities in India and Czech Republic, driven by both new and existing clients.
Looking to exploit its strong customer and skills base, management is exploring ways to improve returns through increasing the value added in its offering. We believe that this could, in time, lead to organic or acquisition-based expansion into niche services or products, such as pre-production services or micromolding. Regardless of the timescale, we are encouraged to see management on the front foot with regard to driving this core business forwards and into new markets.
LED Technologies revenues were significantly ahead of H115 with revenues up by 47.6% and underlying operating profits up by 64.6%. The main driver was the flow-through of a significant proportion of the wave of new supercar lighting programme wins seen in recent years into the later design and development stages, where the bulk of the revenues and profits tend to be earned.
While the focus of the trading update was the loss of the VW Phaeton programme and its short-term impact on revenues and profits, the H1 results focused on securing the flagship vehicle programme for a "major new customer group". Although this relates to only one specialist car programme, management is excited by its potential to address this new group’s ‘mainstream’ luxury products. Management believes that with its technological expertise and manufacturing capabilities firmly established it could potentially address this market. Although the lighting units for such vehicles cost significantly less than its supercar equivalents, the higher volumes and the considerably greater development budgets could enable Carclo to match or exceed its current return from supercars.
Precision Engineering had a subdued first half with a destocking by a major European aircraft OEM, although this was against a weak comparator in FY15. However, order flow subsequently improved towards the end of the half and the business has entered H2 with a stronger order book.
Carclo Diagnostic Solutions continues to match the targeted development timelines. Management remains clearly committed to ensuring that this venture is controlled and the paths taken with CIT are not taken again. A healthcare practitioner review is due to provide evidence of the Micropoc platforms’ commercial viability, one way or another, at the turn of the calendar year.
Balance sheet and cash flow
Net debt at the end of the period was £27.3m, up from £24.5m at the start of the period. The primary driver to this cash outflow was the movement in working capital (£6.4m), which was due mainly to the significant upfront tooling costs on a number of supercar lighting programmes. This is expected to substantially reverse in the second half. Other notable cash flow items included the £3m CIT royalty payment from UniPixel and £1.5m of capital expenditure in China. We forecast net debt to decline to £24.9m at the year end.
Alongside net debt, the pension deficit remains a notable feature of Carclo's balance sheet. As a result of weakness in equity markets and changes in the yield assumptions, the IAS 19 net pension deficit rose by £5.3m to £15.0m over the half. The cash impact is felt in the company’s cash contributions to the scheme, approximately £1m pa, and towards the scheme’s administrative costs, c £0.7m pa. These amounts may change as a result of negotiations with the trustees following the triennial funding valuation of March 2015, but management is hopeful that future payments will be broadly consistent with these amounts.
In our initiation note we considered Carclo’s valuation on a simple multiples-based approach and on a sum-of-the-parts basis. We found that on an earnings multiples basis, Carclo was trading more in line with the ‘jury’s-out’ comparators (TT Electronics, Zytronic and Volex) where the strategy is not given full credit by the market as opposed to the established long-term growth stories (Laird, Gooch & Housego and Victrex). However, following these results, and more significantly the news of the end of the Phaeton contract, the shares now trade at discounts, on a P/E basis, to the 'jury’s-out' comparators, with the exception of the now troubled Volex.
Exhibit 1: Comparator earnings multiples
|
Share price
(p) |
Market cap
(£m) |
EV
(£m) |
Y1
Year end |
EV/EBITDA (x) |
P/E (x) |
|
|
|
|
|
Y1 |
Y2 |
Y3 |
Y1 |
Y2 |
Y3 |
Carclo |
144 |
95 |
120 |
Mar-16 |
8.1 |
7.2 |
|
15.1 |
12.5 |
|
Growth and quality story |
|
|
|
|
|
|
|
|
|
Laird |
348 |
955 |
1114 |
Dec-15 |
10.7 |
9.8 |
9.1 |
15.9 |
14.1 |
13.0 |
Gooch & Housego |
870 |
201 |
195 |
Sep-15 |
11.9 |
11.1 |
10.6 |
21.0 |
19.8 |
18.9 |
Victrex |
1877 |
1527 |
1486 |
Sep-15 |
12.7 |
11.7 |
10.8 |
18.4 |
17.0 |
15.5 |
Average |
|
|
|
|
11.8 |
10.9 |
10.2 |
18.4 |
17.0 |
15.8 |
Jury's out |
|
|
|
|
|
|
|
|
|
|
TT Electronics |
133 |
213 |
264 |
Dec-15 |
6.0 |
5.5 |
5.2 |
15.2 |
13.7 |
12.0 |
Zytronic |
376 |
51 |
43 |
Sep-15 |
7.9 |
7.2 |
|
15.9 |
14.7 |
|
Volex |
56 |
49 |
72 |
Mar-16 |
3.1 |
2.8 |
|
509.1 |
509.1 |
|
Average (ex Volex) |
|
|
|
|
7.0 |
6.4 |
|
15.5 |
14.2 |
|
UK comparator average |
|
|
|
8.7 |
8.0 |
8.9 |
17.3 |
15.9 |
14.9 |
Source: Thomson, Edison Investment Research. Note: Priced at 23 November 2015.
We believe that the loss of the Phaeton contract was not the result of any action by Carclo but a consequence of VW’s emissions scandal. The cancellation of vehicle development programmes like this by leading automotive manufacturers is rare. The nature of Carclo’s visibility and relationships with customers is still, we believe, more akin to those of Laird and Gooch & Housego than with TT Electronics or Volex.
If we apply the FY16e average P/E multiple (18.4x) of the established growth story comparators to our normalised FY16e EPS forecast it yields a value of 175p, 17% ahead of the current share price. Although we consider a certain level of discount is warranted, we regard the current discount as too great and look to further positive news on trading and customer wins to help reduce the discrepancy.
Exhibit 2: Financial summary
Year-end March |
|
£000s |
2013 |
2014 |
2015 |
2016e |
2017e |
|
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
|
|
86,514 |
97,267 |
107,503 |
111,298 |
120,714 |
Cost of Sales |
|
|
0 |
0 |
0 |
0 |
0 |
EBITDA |
|
|
9,106 |
10,220 |
11,402 |
14,043 |
15,837 |
Operating Profit (before amort. and except.) |
5,585 |
6,551 |
7,789 |
10,043 |
11,637 |
Intangible Amortisation |
|
|
0 |
0 |
0 |
0 |
0 |
Exceptionals |
|
|
(670) |
(520) |
(31,668) |
0 |
0 |
Other |
|
|
0 |
0 |
0 |
0 |
0 |
Operating Profit |
|
|
4,915 |
6,031 |
(23,879) |
10,043 |
11,637 |
Net Interest |
|
|
(1,698) |
(1,260) |
(666) |
(1,400) |
(1,200) |
Profit Before Tax (norm) |
|
|
3,887 |
5,291 |
7,123 |
8,643 |
10,437 |
Profit Before Tax (FRS 3) |
|
|
3,217 |
4,771 |
(24,545) |
8,643 |
10,437 |
Tax |
|
|
(408) |
(1,179) |
1,772 |
(2,333) |
(2,818) |
Profit After Tax (norm) |
|
|
3,409 |
4,075 |
6,068 |
6,309 |
7,619 |
Profit After Tax (FRS 3) |
|
|
2,809 |
3,592 |
(22,773) |
6,309 |
7,619 |
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
64.1 |
65.8 |
66.2 |
66.2 |
66.2 |
EPS - normalised (p) |
|
|
5.4 |
6.1 |
7.9 |
9.5 |
11.5 |
EPS - normalised and fully diluted (p) |
|
5.3 |
6.1 |
7.9 |
9.5 |
11.5 |
EPS - (IFRS) (p) |
|
|
4.4 |
5.5 |
(33.2) |
9.5 |
11.5 |
Dividend per share (c) |
|
|
2.6 |
2.7 |
2.8 |
3.0 |
3.3 |
|
|
|
|
|
|
|
|
EBITDA Margin (%) |
|
|
10.5 |
10.5 |
10.6 |
12.6 |
13.1 |
Operating Margin (before GW and except.) (%) |
|
6.5 |
6.7 |
7.2 |
9.0 |
9.6 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
|
|
87,712 |
86,686 |
66,065 |
67,665 |
70,165 |
Intangible Assets |
|
|
44,516 |
45,994 |
26,000 |
23,600 |
24,300 |
Tangible Assets |
|
|
33,449 |
35,657 |
31,721 |
35,721 |
37,521 |
Investments |
|
|
9,747 |
5,035 |
8,344 |
8,344 |
8,344 |
Current Assets |
|
|
48,116 |
46,263 |
49,362 |
50,184 |
55,129 |
Stocks |
|
|
12,574 |
13,363 |
13,440 |
14,027 |
15,213 |
Debtors |
|
|
19,444 |
21,136 |
24,367 |
25,004 |
26,127 |
Cash |
|
|
16,098 |
11,764 |
10,855 |
10,454 |
13,088 |
Other |
|
|
0 |
0 |
700 |
700 |
700 |
Current Liabilities |
|
|
(30,202) |
(34,182) |
(27,515) |
(26,944) |
(30,256) |
Creditors |
|
|
(23,234) |
(22,307) |
(21,802) |
(21,231) |
(24,543) |
Short term borrowings |
|
|
(6,968) |
(11,875) |
(5,713) |
(5,713) |
(5,713) |
Long Term Liabilities |
|
|
(40,504) |
(24,211) |
(46,559) |
(46,559) |
(46,559) |
Long term borrowings |
|
|
(18,308) |
(17,569) |
(29,660) |
(29,660) |
(29,660) |
Other long term liabilities |
|
|
(22,196) |
(6,642) |
(16,899) |
(16,899) |
(16,899) |
Net Assets |
|
|
65,122 |
74,556 |
41,353 |
44,346 |
48,479 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
11,303 |
5,627 |
3,549 |
15,149 |
16,638 |
Net Interest |
|
|
(624) |
(641) |
(650) |
(1,900) |
(1,700) |
Tax |
|
|
(852) |
(753) |
(712) |
(2,333) |
(2,818) |
Capex |
|
|
(11,796) |
(10,942) |
(7,912) |
(9,500) |
(7,500) |
Acquisitions/disposals |
|
|
0 |
0 |
0 |
0 |
0 |
Financing |
|
|
12,534 |
(493) |
103 |
0 |
0 |
Dividends |
|
|
(1,534) |
(1,674) |
(1,752) |
(1,816) |
(1,986) |
Net Cash Flow |
|
|
9,031 |
(8,876) |
(7,374) |
(401) |
2,635 |
Opening net debt/(cash) |
|
|
17,976 |
9,178 |
17,680 |
24,518 |
24,919 |
HP finance leases initiated |
|
|
0 |
0 |
0 |
0 |
0 |
Other |
|
|
(233) |
374 |
536 |
0 |
0 |
Closing net debt/(cash) |
|
|
9,178 |
17,680 |
24,518 |
24,919 |
22,285 |
Source: Carclo, Edison Investment Research
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