Plastic components manufacturer Carclo (LON:CAR) today suffered a share price fall of over 30% as it released a trading update warning that full year results would be significantly be below expectations. As in common with many small-caps issuing profit warnings, longer term investors are likely to be heavily disappointed. Some five years ago at its peak the share price was pushing 500p, and whilst 2018 has seen the price under 100p for most of the year, the latest 30% fall represents a new low:
As well as supplying plastic products, Carclo also are a specialist supplier of LED lights into niche markets. Checking back onto the previous history suggests that things were going nicely until an exceptional write-off of a failed division. Since then there has been a recovery of sorts, but 2018 has been a poor year,with the company giving up a profit warning in January.
It does appear that the warning today is a continuation of issues that have dogged the company in the past year. The trading statement kicked off with good news:
Wipac, the main operating business in the Group’s LED Technologies Division, has been very successful in winning low-volume automotive lighting programmes together with more recent wins in the mid-volume range.
But this quickly has turned bad:
As reported at the half year, a large number of these low-volume programmes have been launched into production this year and the business initially struggled to meet customer requirements. Unfortunately, this situation worsened in the third quarter as the short term operational growing pains continued longer than we had anticipated as demand grew.
The effects of this seem particularly concerning:
The consequences of this have been significant with adverse operational variances, expedited freight deliveries and poor customer service leading to additional unplanned costs and, very recently, to delays in new programme awards and the profit recognition thereon.
The remedial actions (ie calling for more help) sound quite costly. With the Plastics division also behind expectations, the effect for the group as a whole:
Overall, given the significant challenges encountered in the LED Technologies Division, the Board now expects the Group results for the full year to be significantly below its previous expectations with the second half performance anticipated to be similar to that achieved in the first half.
Given that the outlook assumes these problems are resolved, it does seem likely that another warning might be coming.
Carclo occupy a niche of reasonable size, producing LED car lighting, as well as manufacturing plastics for the medical and aviation fields – products which are roughly standard and in demand all over the world. These are traded under three divisions (Plastics, LED, Aerospace) with the first providing the bulk of revenues. Recent growth has come in the LED sector, with its products producing the greatest margins.
The trend in profits has been downward even before the latest warning, with profits and margins falling. Given the issues identified in the latest profit warning, it appears quite worrying that this might be something more structural.
The balance sheet is mixed news. Net debt has increased here to a level several times profits, even if the covenants are being met on a reduced level of profitability. The cashflow statement over the years (left hand side being 2012 onwards):
A lot of costs are being capitalised which appear on the balance sheet under intangible assets. The effect of capex means that whilst the business is profitable in one sense, in a cash sense there is another story. Part of last year’s cash flow reads:
More cash is being spent than is coming in – that has been the pattern for the last 5 years. Whilst it is too much to say they are spiralling out of control, they have risen from £17m in 2014 to over £35m today, aided by some acquisitions along the way.
Another potential problem is that the company carries a relatively large pension deficit of £24.1m. This has resulted in additional net interest charges of £830,000 in 2018, and £792,000 in 2017. Added to the £1.09m interest charge on borrowings and this is a decent chunk of earnings.
This being said, there are good things on the balance sheet. Land and buildings comprise £21m, and another £25m of plant and equipment, meaning that their debts can be asset backed. Cash has decreased, but with a balance of £12m and profits being made, there does not seem any immediate danger.
I find this one a difficult one to read. The directors outlook assume that nothing else goes wrong – which we don’t know with any certainty. Poor customer service is also a rather alarming one to read about. Carclo don’t sell to the public, instead to bigger companies – their top customer comprises c.15% of revenues for instance. So, annoying these type of customers can have very bad effects for business. I don’t know what type of competitive advantages are in their products, but it seems unlikely they would be irreplaceable.
Having said that, there could be a decent business in there. Previous results have shown there is a demand for their products, and that it can be satisfied profitably. Sadly I do believe that the fields they are involved in are always on the lookout for innovation and as such it would remain a capex-heavy business. Given what has gone down today it seems more likely that things will get worse than better in the short term. 2/5.