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Research: Industrials
Dowlais Group’s positive trading update, with growth ahead of the market and continued margin expansion, provides another marker in delivering on the stated strategy. Management intends to drive profitable growth through the EV transition and expand the underlying operating margin to 11% (FY22: 6.6%). Delivery on these targets will highlight the quality of the operations and valuation discrepancy.
Dowlais Group |
Firmly on track despite the UAW strike headwinds |
Trading update |
Automotive components |
9 November 2023 |
Share price performance
Business description
Analyst
Dowlais Group is a research client of Edison Investment Research Limited |
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Dowlais Group’s positive trading update, with growth ahead of the market and continued margin expansion, provides another marker in delivering on the stated strategy. Management intends to drive profitable growth through the EV transition and expand the underlying operating margin to 11% (FY22: 6.6%). Delivery on these targets will highlight the quality of the operations and valuation discrepancy.
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 |
8.0 |
3.8 |
12/24e |
5,799 |
337 |
17.4 |
5.2 |
6.1 |
4.9 |
12/25e |
5,939 |
427 |
22.4 |
6.7 |
4.7 |
6.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Overall trading in the four months (July to October) was in line with Edison’s expectations despite the United Auto Workers (UAW) union strike in North America. Group sales of £1.8bn were up 4.7%, with an adjusted operating margin of 6.8%. Underlying margins pre-central costs were up 100bp on the prior year and 90bp on H123, assisted by a 30% drop through margin on additional business. The impact of the UAW strike is expected to be £30–45m to revenue and £10–15m to operating profit for FY23 (assuming no volume catch-up). We estimate an impact of c 50bp on group operating margins over the four-month period. We estimate a pre-central cost operating margin run rate of over 8% (FY22: 6.6%) indicating positive progress towards management’s target of 11%.
GKN Automotive sales grew by 4.8% y-o-y, c 100bp above the market, compared to being in line with the market in H1. The key activities, Driveline and ePowertrain, both out-performed the market. The adjusted operating margin was 7.6%, an increase on the equivalent prior year period of 120bp and of 110bp versus H123. Order growth continued to be strong, with bookings of £5.4bn for 10 months already a record year (FY22: £5.0bn) with a continued positive mix in relation to the EV transition.
GKN Powder Metallurgy sales grew by 4.2% y-o-y, suggesting a stabilisation of the business given the below market growth seen in H1 (2% vs auto market growth of12%). The operating margin of 9.0% was also stable. In October, the company signed commercial agreements with Schaeffler for the supply of magnets (no financial details released). This is a key milestone in developing the division’s new EV magnets business, which is at the core of its EV/ICE strategy.
Cash generation remains positive, with management expecting net debt at the year end to be below the demerger level of £880m.
There is no change to full year management expectations despite the impact of the UAW strike. Full year results will be published on 21 March 2024. Edison forecasts are unchanged as is our valuation from our initiation note (DCF 186p/share, with a peer group comparison offering upside).
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Research: Investment Companies
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