The FY16 results showed that the core businesses of Technical Plastics and LED Technologies are continuing to grow revenues and expand margins. Management talks with enthusiasm about driving Technical Plastics into exciting new production technologies, and in LED Technologies the win of a medium volume sports car programme could lead to a significant increase in revenues and profits in the medium term. However, in our view, the relative earnings multiples still do not fully reflect the quality and potential of these businesses.
The full year results, published 7 June, came in ahead of our expectations in terms of revenue and underlying EPS, and in line at the net debt level. Revenue was £119.0m vs Edison’s estimate of £111.3m, underlying EPS was 10.1p vs Edison’s estimate of 9.5p and year-end net debt was £24.8m vs Edison’s estimate of £24.9m. The main driver of the outperformance was the LED Technologies division. The clear message of the results and the statement was that the core businesses are growing strongly and are positioned to continue to do so.
Although the figures were good, it was more encouraging to see the results presentation focused on the exciting opportunities in the core markets. In Technical Plastics the discussion was about the potential within micro-moulding and prototyping, with the prospect of both organic and acquisition driven growth. In LED Technologies the win of a medium volume (approximately 30,000 units pa) sports car lighting programme, potentially generating, we believe, £4-6m in revenues a year in 2020 and beyond, is a move into an area that could dramatically change Carclo’s long-term value.
The earnings multiple discounts that Carclo trades at compared to Victrex and Gooch & Housego persists, and its multiples are still more in line with those of TT Electronics and Zytronic, despite Carclo’s clearer and more consistent growth story. Applying the FY17e average P/E multiple (18.9x) of the established growth story comparators to our adjusted FY17 EPS estimate yields a value of 210p, c 30% ahead of the current share price. Although we think that discounts are merited, we view the current discounts as too great. Further delivery on expectations and greater market understanding of the opportunities could well drive a re-rating.