Trading very difficult; forecasts lowered

Prospects are very uncertain, and cost reduction measures are being implemented. However, the group continues to develop its product offering to the automobile turbocharger industry through development of its main operational facilities. The recent technical problems at the new machine shop are now resolved, and Chamberlin remains on track strategically. The recent disposal of Exidor has financially de-risked the group, and the shares remain attractively valued against the peer group on most methodologies.

• Current trading: Trading conditions are challenging. Customer schedules for the European turbocharger market have suffered significant reductions. The Board has consequently implemented several cost-reduction measures. Following a reassessment of the likely outturn in 2H of the current financial year, management now anticipates that the loss in this period will be similar to that in 1H (£0.3m). We have further reduced our forecasts to reflect the more challenging operating environment.
• Strategic developments: Chamberlin recently announced the sale of Exidor, its Safety Lighting business, to ASSA ABLOY Ltd for a total enterprise value of £10m. At transaction multiples of around 1.3x sales and 15x operating profit, we consider the exit to be at an attractive valuation. The transaction is part of the group’s focusing strategy, with proceeds being used to reduce the group’s debt, provide additional working capital, and also to reduce existing pension liabilities.
• Risks: Potential risks include developments with the automotive industry, Brexit uncertainties, foreign currency and raw material price fluctuations. From a financial standpoint, the group has been significantly de-risked with the Exidor disposal proceeds used to reduce the pension scheme deficit and pay down debt.
• Valuation: The shares remain lowly valued, trading on 2020E EV/sales of 0.4x, compared with sector averages of around 1.0x.
• Investment summary: Despite the current trading difficulties, the disposal of Exidor has de-risked the group. The shares offer the opportunity to invest in a cyclical stock with good operational leverage, but they are likely to tread water until brighter prospects become more evident.