Carclo is a leading global designer and contract manufacturer (FY17 sales 70% non-UK) of fine tolerance and often mission critical components for the medical (46%), optics (5%), aerospace (5%) and luxury/supercar (27%) markets.
Despite challenging trading for mass auto manufacturers, there have been more supercars purchased so far this year than for the whole of 2016. Globally too, sales of Bentleys, Ferraris, Lamborghinis, McLarens and Rolls-Royces have collectively jumped >50% since 2012 according to Bloomberg. Good news for the likes of Carclo, as is the apparent absence of significant margin pressure at the luxury-end compared to mainstream names, given their cachet and elevated price-points.
Today’s interims are characterised by out-performance in LEDs (adjusted EBIT up 16% to £3.4m), offset by temporary issues (now largely fixed) in Technical Plastics (-6% £3.2m) and Aerospace (-50% £359k). The upshot being that, even though H1 turnover rose 14% (or 6.5% LFL constant currency) to £72.2m (vs £63.2m LY), both EBIT and EPS fell to £5.4m (-3%) and 4.5p (-19.5%) respectively - with the latter further affected by a higher share-count and tax rate (27.5% vs 23.6%).
Current trading is said to be in line with FY18 PBT expectations of £12.4m (vs £11.0m last year), albeit we understand there are a few outstanding contracts (eg Wipac) that still need to awarded and delivered in Q4. Assuming all goes to plan, then H2 turnover, EBIT and PBT are pencilled in for £77.8m, £9.4m (margin 12.1%) and £8.4m (£4.6m H1) respectively, equivalent to 2/3rds of FY18 profits.
In line with September’s AGM, net debt ticked up to £29.6m (£26m March 2017) on the back of higher capex (£5.7m vs £3.6m) and a £4.4m (£4.5m) working capital build primarily related to Wipac’s design/tooling work on new ‘medium’ volume models. Moreover there was a negative currency effect on the retranslation of overseas borrowings – altogether delivering H1 cash conversion of 66% (vs 58% LY). That said, the pension deficit (net of tax) declined £2.2m to £24.8m from £27.0m, thanks to a small rise in corporate bond yields (2.7% vs 2.6%) and £2.5m of investment gains.
Factoring all this in, our sum-of-the-parts valuation rises to 206p/share (from 200p) – derived from using FY21 EV/EBIT multiples of 14x for Technical Plastics (64% FY17 sales), 12.2x LED Tech (31%) and 10x Aerospace (5%), discounted back at 12%, and adjusted for central overheads and the above balance sheet movements. In relative terms, we believe the stock also looks good value, trading on EV/EBIT and PER and multiples of 9.3x and 10.9x respectively vs peer averages of >16x and >20x.