Research: Industrials
Dowlais Group’s shares trade at a significant discount to our fair value. We have lowered our forecasts due to reduced expectations for automotive production and currency impact, but the key to unlocking value remains the group’s margin trajectory. We expect management to confirm that these targets (pre-central cost operating margin over 10% against 7.1% forecast for FY23) remain on track with the impending maiden set of results.
Dowlais Group |
Automotive production outlook softer |
Forecast update |
Automobiles and parts |
26 January 2024 |
Share price performance
Business description
Next events
Analyst
Dowlais Group is a research client of Edison Investment Research Limited |
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Dowlais Group’s shares trade at a significant discount to our fair value. We have lowered our forecasts due to reduced expectations for automotive production and currency impact, but the key to unlocking value remains the group’s margin trajectory. We expect management to confirm that these targets (pre-central cost operating margin over 10% against 7.1% forecast for FY23) remain on track with the impending maiden set of results.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/22 |
5,246 |
212 |
N/A |
N/A |
N/A |
N/A |
12/23e |
5,487 |
259 |
13.3 |
6.8 |
4.4 |
4.4 |
12/24e |
5,453 |
292 |
14.8 |
6.0 |
5.0 |
4.8 |
12/25e |
5,572 |
357 |
18.3 |
4.9 |
6.2 |
6.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. FY22 EPS and DPS are unavailable as that period is prior to the demerger from Melrose.
Changes to underlying assumptions and forecasts
The automotive market performed well in 2023 with global sales growth of c 9%. Production was also up strongly as supply chain issues and chip shortages abated. This has led inventories to rise, which is likely to lead manufacturers to adjust production levels in 2024. In addition, there is potential disruption from the current Red Sea shipping issues, as Tesla and Volvo have already reported. Hence, we now expect Dowlais’s automotive business to grow 1%, down from 4%, in FY24, still posting market outperformance. Currencies tend to be volatile. Since mid-2023 the Chinese renminbi has weakened, with the US dollar also softer against sterling of late. We estimate that current foreign exchange levels will have a 2–3% impact on Dowlais’ FY24 sterling reported profits. Our FY23 expectations are unchanged, but we have reduced our more forward-looking forecast; for FY24 we now expect PBT of £292m (down 13% from £337m previously), EPS of 14.8p (down 15% from 17.4p) and DPS of 4.4p (down 15% from 5.2p), and for FY25 we now expect PBT of £357m (down 16% from £427m previously), EPS of 18.3p (down 18% from 22.4p) and DPS of 5.5p (down 18% from 6.7p).
Valuation: Undervaluation continues
We use a discounted cash flow (DCF) and peer group comparison to value Dowlais. Rolling our DCF forward as we enter a new financial year offsets the negative impact from short-term numbers (management’s medium-term margin targets are not expected to change) with a valuation of 187p a share. Our peer group derived valuation is inevitably more affected as it is based on near-term forecasts. Our more generic automotive peer group sees a reduction of 9% to 154p a share. Our higher-quality automotive peer group, the financials of which management’s margin targets and group market shares suggests Dowlais should be able to emulate, has been more severely derated of late, leading to a greater impact on our valuation, which reduces by 29% to 186p. All are significantly ahead of the current share price.
FY24 and FY25 expectations recast
We have reviewed our forecasts in light of two particular changes to external assumptions.
Automotive production now expected to be flat
2023 global automotive sales are expected to be around 86m units, an increase of approximately 9%. However, auto production is expected to have increased to around 90m units as chip and supply chain issues seen in 2022 abated. This has led to a rise in inventories, as highlighted by US auto inventory in Exhibit 1, albeit some way down on pre-pandemic levels, with inventory to sales ratios also on the rise. As a consequence, S&P Global Mobility forecasts 88.3m new vehicle sales worldwide in 2024, representing 2.8% growth, but expects production to be flat at 89.8m units. There is also potential disruption from the current Red Sea shipping issues, with Tesla and Volvo having already reported shutdowns due to component shortages. As a result, we have reduced our expectation for growth from 4% to 1% in 2024. Note that we still expect Dowlais to perform ahead of the end market, continuing the trend reported in the latest trading update.
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Exhibit 1: US auto inventory |
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|
Source: US Bureau of Economic Analysis |
Currency headwind emerging
In FY23, the currency impact was limited, with a small benefit from the euro expected to be offset by weakness in the Chinese renminbi. While it is still early days in FY24, the group’s largest territory, North America (at c 36% of sales in FY22), and the highest margin territory, China (c 12% of group EBIT in FY22), are both facing headwinds. We estimate that if current rates are maintained for the full year there will be a 2–3% translation impact in sterling terms.
Exhibit 2: Key currency movements against sterling (GBP)
Euro |
US dollar |
Chinese renminbi |
|
FY23 to FY22 |
(1.0%) |
0.1% |
3.0% |
Current to FY23 |
0.7% |
2.8% |
6.6% |
Source: Refinitiv
|
Exhibit 3: GBP per US dollar |
Exhibit 4: GBP per Chinese renminbi |
|
|
|
Source: Refinitiv |
Source: Refinitiv |
|
Exhibit 3: GBP per US dollar |
|
|
Source: Refinitiv |
|
Exhibit 4: GBP per Chinese renminbi |
|
|
Source: Refinitiv |
Forecast changes
In light of these two issues, we are lowering FY24 and FY25 expectations while leaving FY23 unchanged (full year results are due on 21 March). Note that we do not expect these issues to alter management’s stated medium-term margin targets (Automotive at least 10%, Powder Metallurgy around 14%, translating to c 11% for group).
Exhibit 5: Forecast changes
£m |
2024e |
2025e |
||||
Old |
New |
Change |
Old |
New |
Change |
|
Revenues |
5,799 |
5,453 |
(6.0%) |
5,939 |
5,572 |
(6.2%) |
EBITDA |
713 |
679 |
(4.8%) |
800 |
743 |
(7.2%) |
Normalised operating profit |
423 |
389 |
(8.0%) |
510 |
453 |
(11.3%) |
Targeted operating profit margin (ex-central costs) |
7.6% |
7.4% |
(0.2%) |
8.7% |
8.2% |
(0.4%) |
Normalised PBT |
337 |
292 |
(13.5%) |
427 |
357 |
(16.4%) |
Normalised basic EPS (p) |
17.4 |
14.8 |
(14.7%) |
22.4 |
18.3 |
(18.1%) |
Dividend per share (p) |
5.2 |
4.4 |
(14.7%) |
6.7 |
5.5 |
(17.9%) |
Net cash/(debt) pre IFRS |
(854) |
(851) |
(0.3%) |
(748) |
(755) |
1.0% |
Source: Edison Investment Research
Valuation
Here we provide a summary valuation for Dowlais. Our full methodology is available in our 2023 initiation note.
Discounted cashflow valuation
Exhibit 7 flexes our DCF valuation relative to two key variables, the terminal growth rate and the discount rate. Our expectation is for long-term auto growth of 1–2%, while we assume a discount rate at present of 10%.. This would suggest a valuation of 186p a share.
Exhibit 6: DCF valuation per share (p)
Terminal growth rate |
|||||
Discount rate |
0.0% |
1.0% |
2.0% |
3.0% |
4.0% |
12.0% |
128 |
135 |
143 |
153 |
166 |
11.0% |
146 |
155 |
166 |
180 |
198 |
10.0% |
168 |
180 |
195 |
214 |
240 |
9.0% |
195 |
211 |
232 |
260 |
300 |
8.0% |
229 |
252 |
282 |
325 |
389 |
Source: Edison Investment Research
Peer group valuation
Exhibit 8 provides a valuation matrix based on two automotive peer groups. Peer group 1 uses companies with similar operating activities, while Peer group 2 is based on ‘best in class’ companies, generating higher operating margins but in line with Dowlais management’s stated targets (underlying pre-central cost operating margin over 10% against 7.1% forecast for FY23). The average valuation for Peer group 1 is 154p and for Peer group 2 is 186p.
Exhibit 7: Peer group valuation
EV/EBIT (x) |
EV/EBITDA (x) |
P/E (x) |
|||||||
2023 |
2024 |
2025 |
2023 |
2024 |
2025 |
2023 |
2024 |
2025 |
|
Peer group 1 |
|||||||||
American Axle |
23.3 |
16.3 |
14.7 |
5.4 |
4.9 |
4.9 |
N/A |
28.3 |
15.9 |
Borg Warner |
7.5 |
6.9 |
6.2 |
5.3 |
5.0 |
4.7 |
8.7 |
7.8 |
6.9 |
Dana |
9.7 |
8.3 |
7.1 |
4.8 |
4.4 |
4.0 |
15.6 |
10.5 |
7.2 |
Linamar |
5.0 |
4.5 |
4.1 |
3.1 |
2.7 |
2.6 |
7.6 |
6.8 |
6.1 |
Magna |
10.3 |
8.4 |
7.0 |
6.1 |
5.2 |
4.6 |
13.6 |
11.1 |
9.1 |
Valeo |
8.0 |
6.2 |
4.8 |
2.3 |
2.1 |
1.9 |
9.0 |
6.1 |
4.0 |
Vitesco |
10.6 |
6.2 |
4.7 |
3.7 |
2.8 |
2.4 |
17.9 |
10.6 |
8.1 |
Average |
10.6 |
8.1 |
7.0 |
4.4 |
3.9 |
3.6 |
12.1 |
11.6 |
8.2 |
Peer group 2 |
|||||||||
Autoliv |
10.8 |
8.0 |
6.9 |
7.5 |
6.0 |
5.3 |
13.6 |
10.5 |
8.7 |
Brembo |
9.4 |
8.8 |
8.0 |
5.9 |
5.6 |
5.1 |
11.6 |
10.8 |
9.6 |
Dowlais financials |
341 |
389 |
453 |
621 |
679 |
743 |
13.3 |
14.5 |
18.3 |
Peer group 1 valuation (p/share) |
193 |
161 |
165 |
127 |
124 |
129 |
161 |
168 |
150 |
Peer group 2 valuation (p/share) |
177 |
166 |
177 |
229 |
212 |
211 |
168 |
154 |
168 |
Source: Refinitiv (at 25 January 2024), Edison Investment Research
Overall
The reduction in short-term expectations inevitably has an impact on our peer group-based valuation, a c 8% reduction from our Peer group 1 but a c 29% reduction on Peer group 2, the higher impact reflecting the greater derated of the stocks in light of softer automotive market expectations. Our DCF valuation has been rolled over to 2024. This improves the cash profile given the low margins and restructuring cash spend in 2023, hence our DCF valuation is unchanged at 186p.
Exhibit 8: Financial summary
£m |
2022 |
2023e |
2024e |
2025e |
|
Year to 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
|
INCOME STATEMENT |
|||||
Revenue |
|
5,246.0 |
5,486.6 |
5,453.5 |
5,572.3 |
Cost of Sales |
(3,937.0) |
(4,590.6) |
(4,526.4) |
(4,569.3) |
|
Gross Profit |
1,309.0 |
874.4 |
927.1 |
1,003.0 |
|
EBITDA |
|
594.0 |
621.3 |
679.0 |
742.6 |
Normalised operating profit |
|
333.0 |
341.3 |
389.0 |
452.6 |
Amortisation of acquired intangibles |
(198.0) |
(198.0) |
(198.0) |
(198.0) |
|
Exceptionals |
(48.0) |
(90.0) |
(100.0) |
(70.0) |
|
Associate adjustment |
(29.0) |
(25.8) |
(24.6) |
(25.1) |
|
Reported operating profit |
58.0 |
27.5 |
66.4 |
159.5 |
|
Net Interest |
(121.0) |
(82.0) |
(97.4) |
(95.6) |
|
Profit Before Tax (norm) |
|
212.0 |
259.3 |
291.6 |
356.9 |
Profit Before Tax (reported) |
|
(63.0) |
(54.5) |
(31.0) |
63.8 |
Reported tax |
(14.0) |
6.9 |
1.6 |
(22.2) |
|
Profit After Tax (norm) |
151.8 |
190.9 |
212.5 |
261.4 |
|
Profit After Tax (reported) |
(77.0) |
(47.6) |
(29.4) |
41.6 |
|
Minority interests |
0.0 |
(5.0) |
(6.0) |
(6.0) |
|
Discontinued operations |
0.0 |
0.0 |
0.0 |
0.0 |
|
Net income (normalised) |
151.8 |
185.9 |
206.5 |
255.4 |
|
Net income (reported) |
(77.0) |
(52.6) |
(35.4) |
35.6 |
|
Basic average number of shares (m) |
0 |
1,393 |
1,393 |
1,393 |
|
EPS - basic normalised (p) |
|
N/A |
13.35 |
14.83 |
18.34 |
EPS - diluted normalised (p) |
|
N/A |
13.35 |
14.83 |
18.34 |
EPS - basic reported (p) |
|
N/A |
(3.77) |
(2.54) |
2.56 |
Dividend (p) |
0.00 |
4.00 |
4.40 |
5.50 |
|
Revenue growth (%) |
0.0 |
6.8 |
0.6 |
2.0 |
|
Gross Margin (%) |
25.0 |
16.0 |
17.0 |
18.0 |
|
EBITDA Margin (%) |
11.3 |
11.4 |
12.5 |
13.3 |
|
Normalised Operating Margin (%) |
6.3 |
6.2 |
7.1 |
8.1 |
|
BALANCE SHEET |
|||||
Fixed Assets |
|
5,483.0 |
5,403.0 |
5,263.0 |
5,128.0 |
Intangible Assets |
3,075.0 |
2,965.0 |
2,855.0 |
2,745.0 |
|
Tangible Assets |
1,813.0 |
1,843.0 |
1,813.0 |
1,788.0 |
|
Investments & other |
595.0 |
595.0 |
595.0 |
595.0 |
|
Current Assets |
|
1,450.0 |
1,527.6 |
1,535.2 |
1,559.6 |
Stocks |
498.0 |
532.0 |
535.3 |
546.0 |
|
Debtors |
638.0 |
681.6 |
685.8 |
699.5 |
|
Cash & cash equivalents |
270.0 |
270.0 |
270.0 |
270.0 |
|
Other |
44.0 |
44.0 |
44.0 |
44.0 |
|
Current Liabilities |
|
(1,472.0) |
(1,665.3) |
(1,678.2) |
(1,716.0) |
Creditors |
(1,188.0) |
(1,269.1) |
(1,277.1) |
(1,302.6) |
|
Tax and social security |
(109.0) |
(109.0) |
(109.0) |
(109.0) |
|
Short term borrowings |
0.0 |
(100.0) |
(100.0) |
(100.0) |
|
Other |
(175.0) |
(187.2) |
(192.1) |
(204.4) |
|
Long Term Liabilities |
|
(2,250.0) |
(2,190.2) |
(2,034.1) |
(1,870.2) |
Long term borrowings |
(1,104.0) |
(1,160.5) |
(1,130.6) |
(1,063.0) |
|
Other long term liabilities |
(1,146.0) |
(1,029.8) |
(903.5) |
(807.3) |
|
Net Assets |
|
3,211.0 |
3,075.1 |
3,085.9 |
3,101.4 |
Minority interests |
39.0 |
35.7 |
36.0 |
36.3 |
|
Shareholders' equity |
|
3,172.0 |
3,039.4 |
3,050.0 |
3,065.1 |
CASH FLOW |
|||||
Op Cash Flow before WC and tax |
516.0 |
564.6 |
624.9 |
687.3 |
|
Working capital |
(32.0) |
34.3 |
(1.5) |
(4.9) |
|
Exceptional & other |
(187.0) |
(155.0) |
(105.0) |
(95.0) |
|
Tax |
(72.0) |
(75.3) |
(88.8) |
(106.9) |
|
Net operating cash flow |
|
225.0 |
368.6 |
429.5 |
480.6 |
Capex |
(219.0) |
(290.0) |
(310.0) |
(282.0) |
|
Acquisitions/disposals |
(3.0) |
0.0 |
0.0 |
0.0 |
|
Net interest |
50.0 |
(13.0) |
(33.8) |
(31.4) |
|
Equity financing |
0.0 |
0.0 |
0.0 |
0.0 |
|
Dividends |
0.0 |
(21.1) |
(61.3) |
(71.4) |
|
Other |
(2,011.0) |
0.0 |
0.0 |
0.0 |
|
Net Cash Flow |
(1,958.0) |
44.5 |
24.4 |
95.8 |
|
Opening net debt/(cash) pre IFRS16 |
|
(1,038.0) |
920.0 |
875.5 |
851.1 |
Closing net debt/(cash) pre IFRS16 |
|
920.0 |
875.5 |
851.1 |
755.3 |
Source: Dowlais Group accounts, Edison Investment Research
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|
Research: Healthcare
Basilea has announced receipt of its first sales-related milestone (for an undisclosed amount) from distribution partner Knight Therapeutics. The payment was triggered by combined Cresemba sales in Latin America exceeding a pre-defined sales threshold. Cresemba continues to see strong market traction for the treatment of invasive aspergillosis and mucormycosis, with the drug reporting in-market sales of US$445m in the 12 months ending September 2023 (+22% y-o-y), reflecting a growing market share in value terms (15% globally and 38% in the US among best-in-class antifungals). In FY23 Basilea recorded around CHF30m in milestone payments for lead product Cresemba, including CHF25m from Pfizer in Europe (>CHF355m in upfront and milestone payments received to date). In December 2023, Cresemba was granted a paediatric label expansion in the US, extending market exclusivity to September 2027 (EU decision anticipated in Q124), by which time we estimate sales to peak at c US$700m.