Carclo back on form

With the ill-fated CIT story now finally behind it - the technology has been out-licensed on a multiyear agreement to UniPixel in a deal that should fund debt reduction and closure costs - we think the momentum recently established by Carclo's shares is set to continue. Following a period of substantial investment, the company's remaining businesses are experiencing strong demand and profitability is rising as sales take off. The progress should revitalise tarnished City sentiment and could possibly even produce increased investor interest in Carlco's exciting new healthcare venture. Meanwhile, free cash flow should benefit this year from profit growth and an expected £6m fall in capital expenditure to £5m.

Technical Plastics, which manufactures fine tolerance moulded plastic components and accounted for more than half the group's ongoing underlying profits in 2014, certainly looks poised for substantial growth in coming years. The lion's share of this unit is focused on providing products for cleanroom facilities and diagnostic devices in medical markets, where demand to limit the contamination of products and improve diagnosis is growing rapidly throughout the world.

Carclo is well-placed to profit from these trends having spent the last three years investing £15m to significantly expand capacity and capability in places such as China, the Czech Republic and the US. Management expects 10 per cent sales growth per year and margins look set to rise quickly from the 7.6 per cent achieved last year towards the group's 10 per cent target. Profitability is benefiting from increased capacity utilisation, which now stands at about 70 per cent, and a reorganisation of Carclo's facilities, which involved the closure of a Scottish site in Harthill. The focus on the medical market is also allowing the group to sell more higher-margin products, further benefiting the profitability drive.

Carclo's other major division makes LEDs for top-of-the-range sports cars. Orders are piling up as supercars undergo something of a sales renaissance. Prospects have also been boosted by the group's efforts to develop full LED front light technology to complement its rear light offerings. The order book is bulging and management is confident of achieving double-digit sales growth for some years to come, and the benefits of increased scale should push margins higher.

One thing that the City has yet to factor in to its forecasts is the potential of Carclo's up-and-coming disposable devices Diagnostic Solutions division. As well as its attempts to develop existing devices, Carclo is working on adding new programmes, such as tools to diagnose bacterial infections, cardiac problems and certain cancers. While the venture has significant potential, it's still early days and assigning much in the way of value or hope to this division currently looks premature. However, broker N+1 Singer reckons commercial partners could come on board soon, which would justify more value being ascribed to the operation.