Carclo has announced that while the Technical Plastics and Aerospace divisions have started FY20 well, the costs associated with ramping up an unprecedented number of new low-volume lighting programmes at Wipac remain unacceptably high. Management is therefore reviewing its decision to move into the mid-volume vehicle market. We place our FY20 estimates and valuation under review until further information is provided when the FY19 results are announced in July.
When Carclo announced it had won its first mid-volume design contract three years ago, it flagged that significant investment in working capital and capacity would be required to penetrate this market segment. Given the current operational issues in the Wipac business, which are taking much longer than anticipated to resolve, adding new premises in the US and additional capacity in the UK to accommodate mid-volume production would distract management attention from the core business. In addition, with profits depressed by Wipac inefficiencies, the capital investment needs for expansion may compromise existing banking covenants.
Consequently, Wipac is working with its mid-volume customers on a plan to refocus the operation back on low-volume vehicle markets, for example supporting them in moving some lighting programmes to alternative suppliers. This move will enable Wipac to focus on improving the efficiency of the low-volume operation. We note that similar initiatives instigated last year to improve the margins in the Technical Plastics division had begun to deliver results in H219.