Companies: CAR   

After years of inconsistency, it looks as if plastics and engineering firm Carclo is on course for a future of steady growth. Firstly, the group’s core technical plastics business is improving its margins and moving into higher-growth medical markets. And secondly, there is much potential upside from a controlling stake Carclo owns in a venture called Conductive Inkjet Technology (CIT), which has developed technology to print conductive inks onto plastic.

Previously a highly profitable engineering business, a sharp downturn in the telecoms sector five years ago plunged Carclo into the red. Since then, the directors have focused their attention on the businesses within their stable with most promise and exited many of the original operations.

The recent interim figures to September revealed a profits improvement from £773,000 to £1.7 million. Although some of this improvement came from a pension finance credit, there was profits growth from continuing businesses despite a two per cent decline in turnover to £37.7 million.

The technical plastics arm accounted for well over two-thirds of turnover. It makes injection-moulded plastic components for inhalers, syringes and medical diagnostic kits. To enable it to compete more effectively with the competition, manufacturing has been transferred to the Czech Republic and China. Technical plastics’ operating margins were 5.7 per cent in the first half, up from 2.5 per cent in the first half of the previous year. Management believes these margins could be running at ten per cent by the end of 2007.

The precision engineering division supplies the automotive and aerospace markets. The automotive side, which makes components for specialist lighting and antennas, has been hit by weak demand. Aerospace, however, continues to grow.

As for CIT, where Carclo owns 70 per cent, 2007 could be a transformational year. Products are being developed and near-term uses for its technology include products in the security sector (for anti-tamper products and RFID antennas). Longer-term, there is hope it could find its way into the semiconductor manufacturing sector and/or the aerospace components field.

‘CIT will earn its revenues from selling printing inks based on its UV curable catalytic inks technology,’ says Ian Williamson, Carclo’s chief executive. At the moment CIT development costs are capitalised, though it is expected to start generating cash by 2008-09.

‘We continue to examine ways to maximise the value of our investment in CIT and one option open to us is to spin it off as a stand-alone company,’ says Williamson. ‘However, an early spin-off wouldn’t be in the best interests of Carclo shareholders as we are confident that, as more commercial applications become apparent, the business will command a higher value.’

Like many an old engineer, Carclo has a significant pension deficit. At the end of September, the net deficit stood at just over £13 million. In October Carclo paid additional pension contributions of £1.95 million. Carclo plans to agree a long-term funding plan with the pension fund’s trustees in order to decide an appropriate ongoing annual payment.

Net debt has also improved significantly. At the half-year, it was £18.8 million – a little over one-third the level it was five years ago – and, thanks to property disposals, it could be around £13 million by the end of March.

The dividend has been unchanged at 1.2p a share since it was reinstated in 2003 but it should start to move ahead now that the balance sheet is stronger. Carclo’s tax losses are running out so a tax charge of around ten per cent is expected this year, rising to 20 per cent next year. This means that it will be difficult for earnings per share to grow. Even so, modest growth is expected this year and a rise of around 16 per cent is forecast for the following year.

Though the shares have risen by a third over recent months, Carclo is still trading on less than 12 times forecast earnings for 2007-08. On top of this, CIT could become a valuable asset.

Carclo	LSE	£28.3m	49.50p	-1.50p
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