Carclo – CAR the recovery

Come, Come, Come into my life, could this be the magic at last!

This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.Well that’s the election over at last but really it’s just the start. 

Long suffering investors in Carclo, CAR know just what a battle it has been to get a recovery going after more disappointments than England penalty shoot outs.  Firstly I should put a chart up to show where these have been over the past 30 years:

This company has been around 100 years this year, having started in card clothing back then, it has evolved over time pretty dramatically.  Many will remember it for its Wipac Lighting, In 1998 Wipac was acquired by Carclo and in recent years became specifically known for vehicle LED lights and car antenna. In December 2019 the automotive lighting business of Wipac was acquired by Anrui Optoelectronics Ltd of China. 20 years of owning Wipac, a complete disaster for Carclo investors, left with little to smile about other than pain relief.

From this point on, Carclo were focusing on their precision plastics moulding businesses, Carclo Technical Plastics and their Aerospace business. Then came Covid, which looked like it could be the nail in the coffin, the shares hit a low of 4p and the grim reaper was sharpening his scythe. In September 2020 Nick Sanders took the helm as Exec Chairman. Widely touted as the right hand man to John Molton of Apex Partners fame, a very successful recovery expert.   The FT said:

“Nick is an engineer by training and has over 20 years’ of board experience in UK and international businesses.  His early career was spent in a variety of technical and operational roles at Rolls-Royce and Lucas Aerospace and since 2002 he has been leading turnaround situations in aerospace and manufacturing businesses. In this capacity he served as Executive Chairman of Gardner Aerospace for nine years until 2019. Nick is currently a Non-Executive Director of Doncasters and Non-Executive Chairman of Sertec Group, Cashewglen Limited and a Family Investment Fund.“

So with Nick Sanders running the show, a guy with plenty of cred, it seemed like he was the man and this might be the recover, if he delivers - from 4p to where?

Having touched £5 in 2012, when there were 62m shares, with the current 73.4m shares, there has only been 20% dilution since, giving effectively a previous high of around £4.  Sanders clearly struggled, lots of promises but little delivery other than superficial. So I have been over-excited before and the delivery wasn’t there, but this feels different.

Nick Sanders took on two non exec directors, Frank Doorenbosch and Eric Huchingson.

A year ago, Sanders resigned and Frank Doorenbosch took the helm, Huchinson became the new CFO.

Frank Doorenbosch

With Frank Doorenbosch in charge as CEO, they have a guy with a lot of experience,

Director Strategy and Business SupportDirector Strategy and Business Support, Berry Global, Inc.

Chief Executive Officer, RPC bpi group · Full-time for 2.5 years and Director of Business Improvement at RPC for 9 years and 5 months.  Prior to that he was Integration CEO for RPC for the Paris Area.  In fact the guy has been everywhere in RPC except the loft since 1998

Eric Huchingson

 Eric Hutchinson has spent 40 years at Spirent,10 years as CEO.

Carclo had a presentation on investormeetcompany on Thursday:

https://www.carclo.co.uk/results-and-presentations

Doorenbosch has made some great changes to the business which should have happened years ago.

Carclo now comprises of CTP –

Invitro Diagnostic: development of devices that use patient-specific data to enhance healthcare.

Drug Delivery: such as inhalers and auto-injector pens

Precision Technology: Components for cash storage machines, lighting controls and numerous precision moulded plastic components

Carclo Specialty Division:

Aerospace Industry: Bruntons manufacture mechanical cable assemblies and machined components. Jacottet specialise in mechanical cable assemblies.

Carclo Optics: Office and Industrial LED Lighting Lenses

Fresnel Lenses:  PIR Sensor Lens

All of the businesses are being rationalised so the components and manufacturing methods are standardised throughout the business.  This will reduce costs and increase margins. 

In the US the Tucson Arizona factory has closed and the work moved to the Pennsylvania factory.  This will reduce overheads and again increase margins.

Listening to the investormeetcompany presentation, this is going to provide a big performance boost this year and 2026.

In last weeks results the company announced reduced debt and better cash generation, £15.6m from £7.8m last year and net debt of £29.5m from £34.4m last year, a decline of £4.9m. Net debt/EBITDA ratio (inc. leases) improving from 2.5x to 2.0x  An underlying eps of 1.1p was way above the 1.37p loss predicted by broker consensus a few weeks ago.  Having lost 0.5p eps in H1, that’s 1.6p eps in H2.  Two weeks prior to the results the company said this:

“Carclo plc is pleased to report that our lending bank has demonstrated its ongoing commitment to the Group by agreeing to an extension to the committed facilities to 31 December 2025. This agreement reflects our close relationship and the bank's confidence in Carclo. The terms of the facilities remain unchanged.”

All this taken together sounds much more positive than Carclo investors have been used to in my opinion.  The fly in the ointment for many may have been the pension deficit.  Understanding how actuaries work this all out is way above my pay grade.

“The last triennial actuarial valuation of the Group pension scheme was carried out as at 31 March 2021. This reported an actuarial technical provisions deficit of £82.8m. The statutory accounting method of valuing the Group pension scheme deficit under IAS 19 resulted in an increase in the net liability to £37.2m as at 31 March 2024 (2023: £34.5m).”

Doorenbosch pointed out this was a technical provision and that he expected a big fall later in the year on the next triennial valuation.  Panmure’s note last week said this:

“We expect Carclo to release an updated actuarial pension valuation later this year which hopefully will disclose a lower pension deficit. Given our methodology to derive the target price, should the deficit be say £70m (i.e. £13m lower than the deficit reported in 2021), it would add a further 17p to our target price, a material increase. Furthermore, there could also be a reduction in the annual funding of the deficit which is currently stands at £4.0m.”

Panmure’s target is 30p, 47p if that deficit reduction materialises. I find that quite interesting as to why Panmure plucked £13m out of thin air. The triennial review is due March this year so they are 4 months into it already.

So with so many problems having been tackled head on, with 1.6p eps achieved in H2, with big savings coming this year and next in the US and pension payments possibly reducing, I see scope for far greater earnings than the current forecast of 2.5p eps this year and 5.23p eps next year.  On current forecasts next year’s PE is just 5.1, without beating forecasts.

This is hitting all my recovery buttons, especially with Doorenbosch saying last week that ‘In the past, Carclo has promised the world and not been able to deliver’. Like most problems, the first step is to recognine you have had one so he knows what investors expect imo.

With just 20% dilution since this big high, where could it recover to? They failed on under Sanders in 2021 took these back to 68p just with a little enthusiasm and investor belief.

Two directors made modest purchases yesterday. Doorenbosch and Huchingson have decent skin in the game.

First Equity have been selling down.  They seem to have started buying  around March 2022 at 30p, bult up a position of 11% then started selling right at the low in April around 7p – bottled it? They have spent months reducing from 11% down to 3.9% now after selling another 2 % in recent weeks.  CAR have risen 300% in 3 months while they were selling. I’m looking forward to them being out soon.

I don’t need to see the business in rude health or even sounding like they are done and dusted with restructuring.  I can see debt, cashflow, profit all moving in the right direction and a Board delivering what they have promised.  That’s enough for me in a recovery play – as I like to say “when everything sounds great, it’s far too late”.

This is all of course just my reasoning as to why I’ve been buying this recovery play.  I’m no analyst, I’m talking my own book. Do your own research, satisfy yourself on the detail. I could be totally wrong (in fact I have been once before here, so there you go). Know your risk/reward, these are not a cuddly cosy stock, they are a higher risk, potential higher reward recovery play imo.

Cockney Rebel