As indicated in November, the FY18 out-turn was always dependent on a handful of new orders being awarded in H2. Unfortunately news came this morning that these have now been deferred (but importantly not lost) by the associated customers (2 at Technical Plastics and 3 at Wipac), along with the non-ramp up of volumes at a major non-medical TP client. As a result, FY18 PBT will be “significantly” below previous expectations. Additionally, given these programs would have contributed towards next year’s numbers, the company has also prudently reduced FY19 guidance - albeit still representing “healthy YoY growth”.
Although clearly disappointing, we think today’s ‘near-perfect storm’ should not be viewed as materially damaging to Carclo’s longer term prospects. Here, underpinned by the positive secular tailwinds of rising healthcare spend and increasing model fragmentation within the high-performance car market. In fact, the Board is still hopeful of signing all 5 of these contracts in due course.
What’s more, several self-help measures have been kicked-off in order to improve existing profit margins, especially within Technical Plastics (TP) - with cash continuing to be tightly controlled. Indeed, in terms of the balance sheet the group is “operating well within its banking covenants”, with net debt expected to end March at £33m, equivalent to a comfortable 2x EBITDA (vs 1.5x LY).
With regards to the numbers, we have cut our FY18 and FY19 PBT forecasts to £9.0m (vs £12.4m before and £11m LY) and £11.0m, respectively, which in turn has pushed our valuation down from 206p to 145p/share. That said, we still anticipate the final dividend will be reinstated next year, albeit at a lower level of 1.0p (vs 1.5p).
Separately, and after 14 years as Group Finance Director, Robert Brooksbank has decided to move on at the end of March to pursue other career opportunities. Similarly, Chairman Michael Derbyshire has chosen to step down at July’s AGM and will be replaced by non-exec Mark Rollins. Current Financial Controller, Richard Ottaway, will become interim CFO from 1st April until a permanent successor is appointed.
Finally, even at the last closing price of 125p, we continue to see the stock as good value, trading on 11.5x EV/EBIT and 13.4x PER multiples; or 20%-40% discounts compared to peer averages.