As flagged in the October trading update, Carclo’s H119 performance was adversely affected by delays in commencing three medical programmes. Moreover, all of the new vehicle production programmes planned for FY19, with their attendant start-up inefficiencies, started during the first six months. While these events held back first-half performance, they augur well for a second-half recovery. We therefore leave our estimates broadly unchanged. The reduction in our indicative valuation from144-153p to 125-133p reflects a 24% drop in the prospective P/E multiple for automotive peers since June, rather than a change in Carclo’s investment proposition.
Group revenues declined by 1% year-on-year (0.3% rise in constant currency) during H119 to £71.5m, as an improvement in LED production revenues was counteracted by negative currency effects and delays in starting three medical programmes in the Technical Plastics division (CTP). Profitability was affected by the delays to the medical programmes, a continuation of labour shortages in the US and the effect of starting all of the new lighting production programmes scheduled for FY19 during the first six months of the year. Pre-exceptional group PBT reduced by 22% (14% in constant currency) to £3.6m.
Looking forward, management is confident of a recovery in H219 because the delayed medical programmes have now commenced production and the inefficiencies resulting from multiple production start-ups in the LED division have been resolved. There are signs too that the initiatives to improve CTP margins are gaining traction. We leave our group forecasts broadly unchanged after transferring £0.2m FY19 EBIT from CTP to Aerospace to reflect first-half underperformance in the former and outperformance in the latter and raising FY19 interest by £0.1m.
We use a P/E-based, sum-of-the-parts methodology with three sets of sample peers drawn from the medical device manufacturing (P/E of 13.8x), automotive (mean P/E of 10.6x) and aerospace (mean P/E 19.7x) sectors to reflect the diversity of Carclo’s operations. This gives an indicative valuation range of 125- 133p (previously 144-153p). Newsflow demonstrating that management initiatives are driving margin improvement should be supportive of the valuation helping to close the valuation gap.