Backlog/Guilt-fuelled bonus article! Sun 8/12/2024

Free: CAR Subscriber: SYS1, XPF, MEGP, HEAD

Now that the Xmas parties are out of the way, I’ve been wallowing in guilt about my poor performance here last week. So the best way to sort that out, is to catch up with some companies of interest & reader requests.

Carclo (CAR)

33p (£22m) - H1 Results - RED

I’ve been RED on this “high precision components” manufacturer before, because it’s engulfed in debt and unaffordable pension scheme liabilities. That said, it’s done well to avoid insolvency and dilution, both of which make it high risk.

Underlying operating profit in H1 has improved from £2.2m to £3.4m, so the restructuring efforts do seem to be working.

The trouble is that all this is spent on hefty finance costs, and exceptionals, so statutory PBT is negative £(91)k. Plus of course pension deficit payments don’t go through the P&L, so that’s a large cost.

Outlook -

“The markets for our businesses are stable, this along with our solid HY25 performance, provide the Board with increasing confidence in meeting its full-year expectations. The strategic changes underway are building a strong foundation for sustained performance improvement and we are confident that we remain on track to achieve our long-term strategic goals. “

Net debt excluding leases is heavy at £16.8m, down by £1m from a year earlier. Termination date is end Dec 2025, and CAR says it is “currently refinancing” the bank debt - ie in negotiations, I don’t think anything has been agreed. It says that it wants to use future bank facilities for capex, to automate production. I’d be amazed if the bank agrees to this, without requiring at least some cash from shareholders too, in a placing.

Pension deficit - is the much bigger problem, with the accounting deficit up £1.2m to £37.9m. The 2021 actuarial deficit was much worse, at £82.8m - although that was calculated in Mar 2021. So bulls must be hoping that the 2024 actuarial deficit (work in progress, due Mar 2025) might bring a welcome reduction in the deficit, thanks to higher interest rates since 2022 (which reduce the measurement of pension liabilities), possibly partially offset by a fall in asset values, who knows?

Cash payments into the pension scheme were £1.5m in H1. The agreed schedule is £3.5m pa until 2039. I don’t think that is affordable.

Dividends - none allowed under the bank facilities.

Cashflow statement - the business is clearly being starved of capex (only £270k in H1), which is the only way it’s managed to present a positive cashflow in H1. Checking the annual report shows it has lots of old equipment, mostly fully depreciated, so that tells me it needs to spend a lot of money on new machinery, but can’t afford to at the moment.

Paul’s opinion - there are 3 big risks here -

• The bank may not want to renew facilities in Dec 2025, requiring an emergency equity fundraise.

• Secondly, the pension deficit remains huge, and CAR cannot afford to pay the £3.5m pa deficit recovery payments.

• Thirdly, it wants to automate production, requiring heavy future capex.

I suspect going concern only got signed off as clean because it has (just) over 12 months for the bank facilities to expire (probably why the bank extended the expiry date from July 2025 to Dec 2025). If these results had come out in Jan 2025, then I doubt going concern would have been clean, with bank facilities expiring in Dec 2025.

The balance sheet is negative £(21)m in NTAV, which is valuing the pension scheme on the more lenient accounting basis. So reality could be worse than that, depending on what happens with the Mar 2025 measurement of the actuarial deficit.

To me, the risks are so great that I wouldn’t be interested in owning the equity at pretty much any price.

The business is clearly not capable of de-gearing, whilst funding the necessary capex, and the cash-hungry pension scheme. I doubt it will ever pay divis again. So bulls need to hope that a big rise in profit can be achieved, and that the bank remains co-operative. If that happens, the benefit would flow to equity, and you could have a multibagger on your hands. Note there was £23m in freehold land/buildings on the last balance sheet, which is probably the reason the bank has been lenient to date, as it is likely to have security over the property.

There are lots of problems here, and I think it’s too risky. So RED from me.

A flurry of excitement amongst bulls gradually fizzled out - could the same thing happen again?

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