Carclo [LON:CAR], the LSE-listed, technical plastics supplier will publish its results on Wednesday (12th July).
Based in Ossett, West Yorkshire, the company manufactures fine tolerance moulded plastic components, which are used in medical and electronics products. Established in 1924 to manufacture card clothing, a wire product that combed wool for the textiles industry before it was spun into worsted – a trade that powered Yorkshire through the nineteenth and early-twentieth centuries – the company became a world-leading manufacturer of card clothing.
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However, the textile industry collapsed in Yorkshire after the Second World War leading to decades of decline and regression. Carclo itself expanded its manufacturing operations from card clothing to other wire and steel applications, but in the 1990s it ventured into technical plastic manufacture.
Business transition
Growing mainly by acquisition, the company had disposed of its wire and steel manufacturing businesses by 1997 and became a solely technical plastics business and listed on the Main Market of the London Stock Exchange three years later.
Technically a smallcap business, worth around GBP9.6m today, the company opened the year at 12.5p and as last week’s trading closed on Friday (7th July) was around 12.9p but had ranged between 9.8p and 23p over the last 52-weeks, offering investors a year-to-date return of -0.75 and a one-year return of -36%
The company has had a tough year. Although it has expanded its markets from life-science to include aerospace and defence, optics and technology, and sells its products across the world, the general economic malaise that gripped global markets from the start of last year has impacted its business.
The company lost a major manufacturing contract with an equipment manufacturer that used Carclo products in polymerase chain reaction (PCR) Covid tests that was worth GBP10m to GBP15m a year for 10 years for the company as 2022 closed out and Covid became a thing of the past. Carclo’s management spent a good deal of effort chasing commercial compensation for the cancelled contract.
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The time seemed to be well-spent, as although the Yorkshire plastics manufacturer didn’t get paid the full GBP150m potential value of the contract, in May management announced that its customer had agreed to pay for the design and engineering phase of the contract. Carclo’s recently installed CEO, Frank Doorenbosch, who was given the job in October 2022 said: “The group has now signed a mutually satisfactory settlement agreement with the customer concerning working capital and recompense for business disruption. While the specifics of this agreement remain confidential, it is expected to largely offset the group’s financial exposure arising from the early termination of the contract.”
The company hasn’t pulled up any trees in terms of share price movement in the last year and looking over the last five years has seen a decline in share price from 113.5p in March 2018.
However, the company has shown over the last 99-years that it is resilient – seeing off a decline in the textile and heavy industries in its home county, and a flexibility to identify new markets and invest heavily in them to develop a presence, moving from textiles to steel, to life-sciences and IT hardware and is likely to bring up its century in a positive manner.
Agility and resilience
Doorenbosch said in May in response to the negotiated settlement of its cancelled contract: “The cancellation, though regrettable, has served to highlight Carclo’s capacity for agility and resilience. We have responded promptly, optimising our asset utilisation whilst continuing to focus on our strategy on stability and balance sheet fortification. These actions demonstrate our unwavering commitment to delivering securing long-term shareholder value.”
And long-term is the key factor in Carclo’s future prospects. Although the company isn’t in a sexy product line, or a fashionable address, it is a key supplier to growth industries – especially IT, aerospace and life-sciences – that should experience a strong growth trajectory as this current phase of the economic cycle dissipates. While the share price might take a while to climb back to 113p, the firm is in a solid state.
The short term business pressure, which include and were highlighted by Doorenbosch in the firm’s last trading statement, the rising cost of inputs, and higher interest rates are cyclical in nature and the current trading price may offer an opportunity for new investors to climb onboard.
The share price may dip even lower this week on publication of results, with the company warning that profits will be behind 2022. Instead Doorenbosch and his team have focussed on cash generation, which should see net debt come down. The company has also striven to increase manufacturing volumes, which have kept it apace with demands from the aerospace sector, and in the last part of the period the company noticed that it had been able to increase margins on some of its product lines.
Carclo focusing on debt management
Debt management has also been a focus in the latter part of the year. Carclo’s main lender HSBC, which has lent the business just shy of GBP40m has been supportive of the company through lockdown and the contract loss, and the parties agreed to amend the interest cover and net leverage covenants for the testing periods from June 2023 through to the maturity of the current facility in June 2025 last month. The company is doubling down on organic growth, as opposed to buying and trying to integrate new businesses.
Stability is key in the next few years, and an ability to tough out the downturn. Aiming to achieve a primary ratio, or return on capital employed of 15% through the cycle should put Carclo on a sustainable footing to take advantage of a market rebound and investors should feel positive about the medium- to long-term prospects of this manufacturing business.
Bridgewise rates Carclo as a ‘Hold’. The analyst said: “Carclo’s financial results from 3Q22 demonstrated decent performance, but will likely only help Carclo remain on par with its peers. We do believe, though, that macro-related market conditions will influence its performance more significantly than its individual results. We gave Carclo a 66 rating and a ‘Hold’ recommendation.”
