Carclo has recently announced that its FY18 performance is likely to be lower than previously expected. This is because of contract delays affecting both the Technical Plastics (CTP) and LED Technologies (LED) divisions as well as a delay to the anticipated ramp-up in a non-medical project for CTP, which management expected would benefit H218. We reduce our FY18 and FY19 estimates, introduce FY20 estimates and revise our indicative valuation range from 177-187p/share to 145-154p/share.
The operational issues affecting the CTP division that were noted at the interim stage have been addressed. However, the division continues to be affected by contract delays, specifically the award of two large tooling and automation projects. Management is seeking to reduce reliance on winning new tooling and automation contracts by improving underlying operating margins from existing business. In our November update, we noted that LED divisional growth was dependent on continuing to secure new projects. The award of three new contracts has been delayed due to customers changing their time horizons on vehicle launches. Management is confident that Wipac will be successful in winning a number of these programmes, but the delays will have an impact on divisional FY18 performance. Despite this setback, the group’s LED supercar lighting business has performed as anticipated and new product launches continue to be made on time.
In addition, management had expected an improvement in CTP performance during H218 because a large and longstanding non-medical customer had been indicating a ramp up in demand for moulded components during the period. This has not yet happened. Noting the variability in demand for non-medical projects, which contributed to H118 underperformance as well, management continues to increase the proportion of medical related work, upgrading capabilities at the Czech site so it can take on medical projects.
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 18.0x), automotive (mean P/E of 18.9x) and aerospace (mean P/E 21.3x) sectors to reflect the diversity of Carclo’s operations. This gives an indicative valuation range of 145- 154p per share (previously 177-187p). Newsflow regarding receipt of contract awards should be supportive of the stock, helping to close the valuation gap.