Carclo

Two weeks ago Carclo (CAR) released full year results for the year ended 31 March 2005. Amongst the highlights were a doubling of underlying operating profit, and the revelation that the card clothing business is being sold. We expect future earnings growth will continue to be underpinned by Carclo's commitment to technology, and the efficiencies derived from shifting manufacturing capacity to low cost regions.

Last year, Carclo's profit before tax was £1.7 million compared to a loss of £6.7 million in 2004. Underlying operating earnings doubled to £4.6 million, even though turnover dipped 7 percent to £107.7 million. Earnings were boosted by restructuring gains, along with a number of new high margin specialist lighting contracts in the Automotive division.

Passing on increases in raw material costs to customers has been a major challenge facing the Carclo. We were therefore heartened to learn that the company has been able to recover the majority of polymer increases and a substantial portion of steel price rises.

Earnings in the specialist wire division fell 27.3 percent to £1.4 million, due to a subdued performance from Card Clothing. Therefore we were pleased to see that subsequent to year end, Carclo sold the troubled card clothing business for £8.6 million in cash to NV Bekaert SA.

We believe that long-term earnings growth in Carclo's continuing businesses will be technology-driven. The world-leading joint venture "Conductive Inkjet Technology" (CIT) holds the most promise. CIT's patented process to digitally print pure metal onto plastic has a number of exciting applications, including Radio Frequency Identification (RFID). Management confirmed that CIT should begin generating revenue in the current year.

We are also encouraged by the company's improved balance sheet. Following the Card Clothing disposal, net debt will have fallen to around £20 million, reducing gearing to 41 percent. Liquidity is also trending upwards - free cash flow in the year more than doubled to £5.1 million.

In our opinion management have laid the foundations for significant long-term earnings growth. Carclo has successfully restructured in recent years with production shifted to lower cost regions and the sale of non-core assets. As such, we regard Carclo's current valuation fundamentals as undemanding, with an underlying trailing price earnings multiple of less than 13 times and a 1.6 percent yield. The shares are also supported by net tangible asset backing of 63p.