Carclo (LON:C1Y)’s year-end trading update notes that Wipac’s costs remained at higher than expected levels during Q419 as the business endeavoured to address the challenges of commencing production on an unprecedented number of new programmes at the same time. As a result, we cut both our FY19 PBT and EPS estimate by 9%, while leaving our FY19 revenue estimate and FY20 estimates unchanged.
High cost of starting multiple programmes
As discussed in our January update, during H119 LED divisional profitability was hit by starting all of the new lighting production programmes for the year during the period. 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, the costs of scrap, freight and production labour remained at higher than expected levels through Q4. We therefore reduce our FY19 PBT estimate by £0.6m (9%) and will assess whether any cuts to FY20 profit estimates are required when there is greater visibility on progress when the full year results are announced. We note 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. This adversely affected net debt at end FY19, which was slightly above the end H119 level. The bank has deferred the net debt to EBITDA banking covenant test at 31 March 2019 by one month while Carclo completes discussions with certain customers regarding earlier than planned payments for design and development work.
Second half recovery in Technical Plastics confirmed
The other two divisions performed as anticipated during FY19. Importantly, the trading statement notes that ongoing initiatives to improve margins in the Technical Plastics division have supported the anticipated second half recovery and year-on-year improvement in divisional operating profit.
Valuation: Earnings recovery to drive share price
Carclo, which has a diversified model, is trading on an updated FY19e P/E of 3.4x, substantially lower than the weighted mean of peers across the medical device manufacturing, automotive and aerospace sectors (15.7x). Newsflow demonstrating that the Wipac issues have been resolved and the bank covenant test passed should be supportive of the shares. We note that at current levels, the stock trades at a substantial discount to net assets (£56.0m) and PP&E (£49.7m) at end H119, potentially attracting additional M&A interest.
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.
