Chamberlin Plc

Turbo-charging into a new growth phase

21 Mar 2017 / Corporate research

Chamberlin is refocussing. Following its major contract win and with improved competitiveness, Chamberlin is further 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 are attractively valued both against its peer group and on a DCF basis.

  • Growth prospects: Sales are driven by the global automotive industry and engineering economy with 75% of sales ultimately exported from UK. The main growth opportunity is the turbocharger castings market, benefiting from regulatory drivers and limited competition. Growth will be driven by the recent contract win with leading turbocharger producer, IHI Europe and enhanced competitiveness from recent £ 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 recent contract win reflects the ability to compete internationally in its specialist area.Trading update/financials: the recent trading update was positive and results reflected the improving operating environment. They were much as expected. Gross margins are now around 20%, EBITDA is at over £2.0m with margins at over 7%. Net debt at 31st March 2017 will stand at around £6.0m compared with £3.2m at 31/03/16.
  • Valuation: The shares are most attractively valued trading on calendar 2017 EV/sales and EV/EBITDA of 0.4 and 4.0 times respectively compared with sector averages of 0.9 and 6.9 times respectively. Our DCF valuation, using a WACC of 10% suggests that the shares are significantly 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 are most attractively valued against its peer group and on a DCF basis.
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