Chamberlin Plc

One-off cost inefficiencies lead to lower forecasts

18 Oct 2017 / Corporate research

Chamberlin remains on track strategically, developing its product offering to the automobile turbocharger industry through expansion of its principal operational facilities. Revenue growth is meeting expectations but one-off in-house cost inefficiencies lead to lower forecasts. The risk/reward profile however remains favourable and the shares remain attractively valued both against its peer group and on a DCF basis.

  • Trading Update: Revenues for the 1H’ 17/18 financial year are in line with management expectations, reflecting overall good demand levels across the foundry and engineering businesses Demand for turbo charger bearing housings, a key growth driver for the group, continues to grow strongly. The two engineering operations, Exidor and Petrel, continue to trade in line with expectations. However, margins within the Group’s foundry businesses have been adversely affected by production issues. The Company is addressing these issues and is working very closely with the machine and tooling suppliers to rectify this one-off situation in the near term.
  • 2017/18 Forecasts: Whilst management still expects group revenues for the year to be substantially ahead of last year but underlying profits are now only expected to be in-line year with the prior year. We have reduced our 2017/18 profitability expectations for the Foundries business and group underlying PTP forecasts from £1.94m to £0.76m. We are making minor adjustments to our 2018/19 forecasts
  • Valuation: The shares remain lowly valued, trading on calendar 2017 EV/sales and EV/EBITDA of around 0.4 and 5.0 times respectively, compared with sector averages of 1.2 and 8.8 times respectively. Our DCF valuation, using a WACC of 10% suggests a fair value at around 200p.
  • Investment summary: The company has repositioned 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 shares remain attractively valued against its peer group and on a DCF basis.
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