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Research: Industrials
There are two key pillars to the investment thesis for Dowlais: achieving c 11% operating margins in the medium term and successfully navigating the electrification shift in the automotive sector. The interim results provide further evidence that the company is on track to deliver on both.
Dowlais Group |
Margin and EV journey accelerating |
Interim results |
Automotive components |
13 September 2023 |
Share price performance
Business description
Analyst
Dowlais Group is a research client of Edison Investment Research Limited |
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There are two key pillars to the investment thesis for Dowlais: achieving c 11% operating margins in the medium term and successfully navigating the electrification shift in the automotive sector. The interim results provide further evidence that the company is on track to deliver on both.
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 |
4.0 |
9.0 |
3.3 |
12/24e |
5,799 |
337 |
17.4 |
5.2 |
6.7 |
4.3 |
12/25e |
5,939 |
427 |
22.4 |
6.7 |
5.3 |
5.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Interim results show good overall progress. Sales growth was 10% but key was the operating margin expansion from 5.0% to 6.3%, showing positive progress on the target of c 11% for the group (ex central costs and Hydrogen). Automotive division revenue growth of 12% was in line with the global automotive market (with pricing benefits assisting against the negative geographical mix). Drop through was high at 39%, assisted by restructuring benefits and a softer comparable, leading to strong operating margin expansion from 3.9% to 6.5%. Powder Metallurgy division sales were up 2%, reflecting softer industrial markets and the impact of the shift to EVs. The operating margin of 9.2% was down from 10.5%, but up from 8.2% in H222 as the North American manufacturing issues were worked through. We note that the Q123 margin of 8.3% and 10.0% in Q223 suggest positive momentum. The Hydrogen division lost £8m as expected as it remains in the development/early commercialisation stage. Underlying group earnings per share was 7.2p and an interim dividend of 1.4p a share was declared.
The electrification pathway is on track. The Automotive order intake was over £3bn with a book-to-bill ratio of 1.3x. 78% of the intake was for EVs, including a 3-in-1 full EV drive system (motor, inverter and gearbox) for a high-end SUV due to be launched in early 2026. Powder Metallurgy’s order intake was +36% with 67% of orders for propulsion agnostic chassis and EVs (and a further 8% for industrial). In addition, the strategy to expand into the production of magnets for EVs is developing, with the award of the first small-scale contract with a major Tier 1 customer and 28 ‘requests for quotations’ received in the half.
Cash flow was positive. Free cash flow was £33m despite £82m of restructuring spend and £11m of additional pension contributions, albeit assisted by capex of £122m running at only 1.0x depreciation (longer-term guidance 1.5x). Net debt was £849m with leverage (net debt/EBITDA) down from 1.5x on demerger to 1.4x.
There is no change to management guidance or Edison forecasts. The company reported a strong first half but automotive markets tend to be seasonally softer in H2 (fewer working days) and there remains uncertainty over the impending United Auto Workers union strike in North America (management estimates c 15% potential exposure), hence the conservative narrative. The next scheduled trading update is due on 28 November.
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Research: Industrials
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