Struggling Carclo plc jumps 15% after results. But is the company back on track?
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Shares in Carclo (LSE: CAR), the global supplier of technical plastics products, have rallied by more than 15% today after the company issued an upbeat trading update for the six months ending September 30, 2016.
For the period the company reported a 10.7% increase in revenue to £63.3m, up from £57.2m for the first half of 2015. The company’s operating profit before exceptional items grew by 19% to £5.6m compared to £4.7m for 2015 and Carclo’s underlying operating margin increased by 62 basis points to 8.8%. Earnings per share rose by 24.4% to 5.6p.
However, despite the company’s robust headline results, there are some worrying numbers in today’s trading statement. For example, as anticipated net debt rose to £27.6m at the half year, due partly to the impact of currency movements on the re-translation of the group’s US dollar and Euro denominated. Additionally, IAS 19 retirement benefit liability net of deferred tax increased to £42.6m from £18.9m at the previous year end.
Still, since the half-year end, the group has raised £7.7m via way of placing 6.6m new shares at 120 per share. £4.7m of the funding has been used to used to repay the short-term debt facility used to fund the initial consideration for the acquisition of Precision Tool & Die with the rest being utilised to repay other debt facilities. As a result, overall group net debt should be significantly reduced at the end of Carclo’s financial year.
Good news for shareholders
All in all, today’s half-year update from Carclo is full of good news for shareholders. While the group seemed to be stumbling earlier in the year, in now looks as if the firm is back on track. Management certainly believes this to be the case.
In today’s update management declared that the group is “trading in line with its expectations for the full year.” City analysts are expecting the company to report a pre-tax profit of £10.7m for the year ending 31 March 2017 and earnings per share of 11.2p. Based on these forecasts the shares are trading at a forward P/E of 11.2p. Full-year earnings per share growth of 11% is pencilled in for this fiscal year followed by 14% for 2018.
If Carclo hits these targets, then it could be a super cheap growth stock. Based on current estimates the shares are trading at a forward P/E of 8.8 for the year ending 2018.
Why so low?
The question is, why is the market placing such a low valuation on Carclo’s shares? It’s difficult to know exactly, but it would appear the market is discounting the pension deficit from the group’s balance sheet. Management cut Carclo’s dividend payout to investors earlier this year to help manage pension payments and this might be a sign of things to come if the deficit continues to balloon — there might be further pain to come for shareholders.
So, if Carclo’s pension issue worries you, it might be wise to stay away from the company. On the other hand, if you’re not worried about the pension, the shares appear to offer growth at a reasonable price.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.