On-track; Turbo-charging into a new growth phase

Chamberlin is on track both strategically and operationally following its recent repositioning move. The Group is developing its product offering to the automobile turbocharger industry through expansion of its principle operational facilities. The risk/reward profile remains favourable and the shares remain attractively valued both against its peer group and on a DCF basis.

• 2016/17 results and outlook statement: 2016/17 results were in line with expectations. Underlying revenues were up 10% with gross margins up at 21.6%. Net debt at 31st March 2017 was £6.8m. The outlook statement was positive with the Board confident of further progress through 2017. We are maintaining our 2017/18 forecasts for strong profitable revenue growth.
• Growth prospects: Sales are driven by the global automotive industry and engineering economy with 53% of sales exported from UK. The main growth opportunity is the turbocharger castings market, benefiting from petrol-engine downsizing, regulatory drivers and limited competition. Growth will be driven by the recent contract win with leading turbocharger producer, BorgWarner and enhanced competitiveness from £ weakness.
• Competitive Positioning: Chamberlin operates across diversified markets with high barriers to entry protected by process know-how and market regulation. We believe that the Group has a strong, credible management team with a proven track record. The 2017 contract win reflects the ability to compete internationally in its specialist area.
• Valuation: The shares remain attractively valued, trading on calendar 2017 EV/sales and EV/EBITDA of 0.5 and 6.1 times respectively, compared with sector averages of 1.1 and 8.7 times respectively. Our DCF valuation, using a WACC of 10% suggests that the shares remain undervalued with a fair value estimated at over 200p.
• Investment summary: The company is repositioning itself from a traditional engineering company to become a key supplier to the automotive turbocharger sector. The shares offer the opportunity to invest in a cyclical stock with high operational leverage. The risk/reward profile remains favourable and the shares remain attractively valued against its peer group and on a DCF basis.