Carclo is focusing investment on its two larger established businesses – Technical Plastics (CTP) and LED Technologies (LED). Here a differentiated offer and long-term relationships with customers provide good earnings visibility and higher probability of a sustainable return. This strategy delivered strong revenue and profits growth during FY17. Despite a temporary setback at CTP during H118, which was balanced by outperformance at LED, growth appears set to continue, underpinned by contracts with blue-chip customers.
The AGM statement noted that CTP’s performance so far in FY18 has been held back by key new programmes slipping from H118 into H218 as well as some operational issues, which have been resolved. This has been balanced by outperformance at LED, where the level of design, development and tooling activity was ahead of expectations. In addition, the small Aerospace division is expected to have stronger sales in H218 as some new programmes move to serial production. We leave our estimates broadly unchanged, moving some FY18 revenue and profit from CTP to the LED Technologies and Aerospace divisions.
As well as capacity, Carclo is investing in acquisitions to add key capabilities. USbased Precision Tool and Die (PTD), acquired in October 2016, provides tool making capability for existing CTP customers. Czech-based FLTC, acquired in March 2017, added over 30 designers to the Wipac team, enabling it to work on multiple mid-volume programmes in parallel.
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 16.1x), automotive (mean P/E of 16.4x) and aerospace (mean P/E 20.9x) sectors to reflect the diversity of Carclo’s operations. This gives an indicative valuation range of 182- 193p (previously 181-191p), which is equivalent to an implied EV/EBITDA range of 8.2x-8.6x (vs peer group blended year one EV/EBITDA of 8.7x). The share price has dropped by around 13% since the AGM statement advised of short-term setbacks in the Technical Plastics division. Positive newsflow confirming the recovery in CTP should be supportive of the stock, helping to close the valuation gap.