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.
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.
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.
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.