Dowlais Group — Margin expansion despite mixed auto markets

Dowlais Group (LSE: DWL)

Last close As at 24/06/2024

GBP0.74

0.85 (1.16%)

Market capitalisation

GBP1,024m

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Research: Industrials

Dowlais Group — Margin expansion despite mixed auto markets

Dowlais Group’s traditional automotive and powder metallurgy operations continue to outperform the market, albeit the slowdown in EV adoption has affected ePowertrain, leading to a marginal reduction in expectations. However, the key remains further progress in operating margins (6.1% in the period, up 30bp) on the journey to c 10%. This margin expansion should drive earnings momentum and subsequently share price performance.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Dowlais Group

Margin expansion despite mixed auto markets

Trading update

Automobiles and parts

22 May 2024

Price

72p

Market cap

£1,000m

Net debt (£m) at 31 December 2023

847

Shares in issue

1,388.0m

Free float

97%

Code

DWL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.6)

(16.3)

(48.1)

Rel (local)

(17.1)

(23.6)

(52.1)

52-week high/low

144p

76p

Business description

Dowlais Group is an automotive components group with two core divisions: GKN Automotive is the market leader in drive systems for both ICEs and EVs, and GKN Powder Metallurgy is the leader in sintered component manufacture and number two in metal powders.

Next events

Interim results

13 August 2024

Analyst

David Larkam

+44 (0)20 3077 5700

Dowlais Group is a research client of Edison Investment Research Limited

Dowlais Group’s traditional automotive and powder metallurgy operations continue to outperform the market, albeit the slowdown in EV adoption has affected ePowertrain, leading to a marginal reduction in expectations. However, the key remains further progress in operating margins (6.1% in the period, up 30bp) on the journey to c 10%. This margin expansion should drive earnings momentum and subsequently share price performance.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

5,246

212

(15.3)

0.0

N/A

N/A

12/23

5,489

264

13.8

4.2

5.2

5.8

12/24e

5,350

247

13.1

4.2

5.5

5.8

12/25e

5,477

297

16.1

4.8

4.5

6.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Trading affected by EV slowdown

Trading for the first four months showed softer sales at £1.7bn, organic down 1.9%, but operating margin improvement of 30bp to 6.1%. Currencies also proved a headwind of c 5%, primarily the Chinese renminbi. Automotive revenue declined 3.3%, with traditional Driveline and the China JV positive and continuing to outperform the market, but more than offset by weakness in ePowertrain. The softness in battery electric vehicle (BEV) related business reflects the volatility being seen in the end-market, with EV growth having stalled, leading original equipment manufacturers to reduce schedules. Operating margins improved, despite volatility and volumes in ePowertrain, assisted by restructuring benefits and inflationary pass throughs. New business wins are in line with company expectations across ICE and BEV and support management’s medium-term operating margin target of 10%+. Powder Metallurgy posted organic sales growth of 4.0%, ahead of the market. This was driven by improved performance in its ICE-related business as it benefited from restocking in the period, and growth in the non-ICE-related portfolio. Operating margin improved, assisted by volume and restructuring in the North American business undertaken in H223.

Outlook: Margin progression/H2 weighting

Management expects FY24 organic sales to be slightly lower than FY23 and weighted to the second half, broadly in line with the market (S&P forecasts flat light vehicle production in 2024). With restructuring benefits, management expects to make progress towards its medium-term operating margin target of 10%+ and increase free cash generation. We have tweaked our forecasts to reflect the lower volumes (FY24 normalised PBT of £247m, down 5.4%, EPS of 13.1p, down 1.9%), but we now expect net debt to be £852m down from £929m due to lower capex.

Valuation: Significant discount to peers remains

Our generic drivetrain automotive peer group-derived valuation comes to 143p per share and our aspirational peer group of automotive stocks generating double-digit EBIT margins, in line with Dowlais management targets, comes to 182p.

Forecasts

Management guidance has been reduced from ‘similar to the prior year, at constant currency’ to ‘slightly below prior year at constant currency’. Performance is still expected to be weighted to the second half, assisted by both the market and new contracts coming into production. Clearly, this change reflects the impact of the EV slowdown. We would expect to have some drop through to the margin. Note that we already expected a currency headwind, which is potentially easing at today’s rates.

Exhibit 1: Forecast changes

2024e

2025e

£m

Old

New

Change

Old

New

Change

Revenues

5,482

5,350

(2.4%)

5,612

5,477

(2.4%)

Normalised operating profit

370

356

(3.8%)

417

406

(2.6%)

Operating profit margin (ex-central costs)

7.0%

7.0%

(0.1%)

7.6%

7.5%

(0.0%)

Reported operating profit

64.9

51.6

(20.4%)

151.1

141.2

(6.6%)

Normalised PBT

261

247

(5.4%)

302

297

(1.7%)

Normalised basic EPS (p)

13.3

13.1

(1.9%)

15.9

16.1

1.7%

Dividend per share (p)

4.2

4.2

0.0%

4.8

4.8

1.7%

Net cash/(debt)

(929)

(852)

(8.3%)

(875)

(794)

(9.3%)

Source: Edison Investment Research

Valuation

Our preferred method for Dowlais Group is a peer-based valuation. Peer group 1 has drivetrain/powertrain operations along with other predominantly automotive activities. Peer group 2 comprises automotive stocks generating double-digit EBIT margins, in line with Dowlais Group’s management target. The average valuation using the generic peer group 1 comes to 143p a share (from 131p) and to 182p a share (from 181p) using the aspirational peer group 2.

Exhibit 2: Peer valuation

Market cap

EV/EBIT (x)

EV/EBITDA (x)

P/E (x)

EBIT margin

£m

2024

2025

2024

2025

2024

2025

2024

2025

Peer group 1

American Axle

729

13.8

12.5

4.6

4.5

20.2

11.8

4.0%

4.4%

Dana

1,605

8.7

7.3

4.4

4.0

12.0

8.1

4.3%

4.9%

Linamar

2,559

5.0

4.7

3.2

3.0

6.9

6.3

8.7%

8.9%

Magna

10,718

8.8

7.5

5.2

4.7

11.3

9.3

5.4%

6.1%

Valeo

2,626

7.9

5.6

2.5

2.2

9.3

5.0

3.9%

5.2%

Vitesco

2,378

6.4

4.6

2.6

2.2

10.8

7.8

4.2%

5.6%

Median

8.3

7.3

4.4

4.0

10.8

8.0

4.3%

5.6%

Peer group 2

Autoliv

8,025

9.6

8.2

7.2

6.3

12.8

10.4

10.7%

11.9%

Borg Warner

6,612

8.3

7.5

5.9

5.4

9.0

8.0

9.4%

9.7%

Brembo

3,003

9.5

8.5

5.9

5.4

11.6

10.2

10.7%

11.3%

Median

9.1

8.1

6.3

5.7

11.1

9.5

10.3%

11.0%

Dowlais financials (EBIT, EBITDA, EPS)

356

406

631

686

13.1

16.1

7.0%

7.5%

Peer group 1 valuation (p/share)

162

159

116

152

130

122

Peer group 2 valuation (p/share)

173

168

226

146

154

145

Source: LSEG, Edison Investment Research

Exhibit 3: Financial summary

£m

2022

2023

2024e

2025e

2026e

Year to 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

5,246

5,489

5,350

5,477

5,661

Cost of Sales

(3,937)

(4,611)

(4,440)

(4,491)

(4,586)

Gross Profit

1,309

878

909

986

1,076

EBITDA

 

 

594

618

631

686

738

Operating profit (before amort. and excepts.)

 

333

355

356

406

458

Amortisation of acquired intangibles

(198)

(197)

(197)

(197)

(197)

Exceptionals

(48)

(578)

(80)

(40)

(20)

Associate adjustment

(29)

(30)

(28)

(28)

(29)

Reported operating profit

58

(450)

52

141

212

Net Interest

(121)

(91)

(109)

(109)

(105)

Finance exceptionals

19

Profit Before Tax (norm)

 

 

212

264

247

297

353

Profit Before Tax (reported)

 

 

(63)

(522)

(57)

32

107

Reported tax

(14)

27

7

(15)

(34)

Profit After Tax (norm)

152

198

186

223

265

Profit After Tax (reported)

(77)

(495)

(50)

17

73

Minority interests

(5)

(6)

(7)

(8)

(9)

Net income (normalised)

147

192

179

215

256

Net income (reported)

(82)

(501)

(57)

9

64

Average Number of Shares Outstanding (m)

0

1,393

1,363

1,333

1,333

EPS - normalised (p)

 

 

(15.3)

13.8

13.1

16.1

19.2

EPS - normalised fully diluted (p)

 

 

(15.3)

13.8

13.1

16.1

19.2

EPS - basic reported (p)

 

 

N/A

(36.0)

(4.2)

0.7

4.8

Dividend (p)

0.0

4.2

4.2

4.8

5.8

Revenue growth (%)

0.0

6.3

(1.8)

2.2

3.2

Gross Margin (%)

25.0

16.0

17.0

18.0

19.0

EBITDA Margin (%)

11.3

11.3

11.8

12.5

13.0

Normalised Operating Margin (%)

6.3

6.5

6.7

7.4

8.1

BALANCE SHEET

Fixed Assets

 

 

5,483

4,717

4,552

4,422

4,302

Intangible Assets

3,075

2,365

2,255

2,145

2,035

Tangible Assets

1,813

1,751

1,696

1,676

1,666

Investments & other

595

601

601

601

601

Current Assets

 

 

1,450

1,517

1,496

1,521

1,557

Stocks

498

510

501

512

528

Debtors

638

628

617

630

650

Cash & cash equivalents

270

313

313

313

313

Other

44

66

66

66

66

Current Liabilities

 

 

(1,472)

(1,446)

(1,554)

(1,587)

(1,638)

Creditors

(1,188)

(1,179)

(1,158)

(1,183)

(1,221)

Tax and social security

(109)

(100)

(100)

(100)

(100)

Short term borrowings

0

(2)

(100)

(100)

(100)

Other

(175)

(165)

(197)

(204)

(217)

Long-term liabilities

 

 

(2,250)

(2,222)

(2,026)

(1,906)

(1,763)

Long-term borrowings

(1,104)

(1,158)

(1,065)

(1,007)

(906)

Other long-term liabilities

(1,146)

(1,064)

(962)

(899)

(857)

Net Assets

 

 

3,211

2,566

2,468

2,450

2,459

Minority interests

39

36

33

33

33

Shareholders' equity

 

 

3,172

2,530

2,435

2,417

2,426

CASH FLOW

Operating Cash Flow

516

537

556

610

659

Working capital

(32)

18

10

(5)

(8)

Exceptional, pension & other

(187)

(168)

(145)

(85)

(75)

Tax

(72)

(61)

(62)

(74)

(88)

Net operating cash flow

 

 

225

326

360

446

488

Capex

(219)

(262)

(240)

(282)

(294)

Acquisitions/disposals

(3)

0

0

0

0

Dividends received from JV

59

63

58

59

61

Net interest

(9)

(63)

(86)

(86)

(82)

Free cash flow

 

 

53

64

92

137

173

Equity financing/buy-back

0

(7)

(35)

(15)

0

Dividends paid

0

(26)

(62)

(64)

(73)

Other

(1,971)

2

0

0

0

Net Cash Flow

1,038

33

(5)

58

100

Opening net debt/(cash)

 

 

(1,918)

880

847

852

794

Closing net debt/(cash)

 

 

880

847

852

794

693

Source: Dowlais accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Dowlais Group and prepared and issued by Edison, in consideration of a fee payable by Dowlais Group Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Dowlais Group and prepared and issued by Edison, in consideration of a fee payable by Dowlais Group Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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