Dowlais Group — Motoring forward

Dowlais Group (LSE: DWL)

Last close As at 22/05/2024

GBP0.72

−4.70 (−6.12%)

Market capitalisation

GBP1,089m

More on this equity

Research: Industrials

Dowlais Group — Motoring forward

Dowlais Group’s first set of results were ahead of our expectations, with positive cash generation a highlight despite restructuring and demerger costs. Softer automotive markets will limit margin progress in FY24 towards the double-digit target. Despite this, margins of c 6.5% are still ahead of automotive peers, although the shares trade at a significant discount to our implied generic peer-based valuation.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Dowlais Group

Motoring forward

Preliminary results

Automobiles and parts

21 March 2024

Price

90p

Market cap

£1,260m

Net debt (£m) at 31 December 2023

847

Shares in issue

1,393m

Free float

98.8%

Code

DWL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.3

(12.0)

N/A

Rel (local)

2.9

(12.1)

N/A

52-week high/low

144p

85p

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

AGM

21 May 2024

Analyst

David Larkam

+44 (0)20 3077 5700

Dowlais Group is a research client of Edison Investment Research Limited

Dowlais Group’s first set of results were ahead of our expectations, with positive cash generation a highlight despite restructuring and demerger costs. Softer automotive markets will limit margin progress in FY24 towards the double-digit target. Despite this, margins of c 6.5% are still ahead of automotive peers, although the shares trade at a significant discount to our implied generic peer-based valuation.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

5,246

212

15.3

0.0

5.9

N/A

12/23

5,489

264

13.8

4.2

6.5

4.7

12/24e

5,482

261

13.3

4.2

6.7

4.7

12/25e

5,612

302

15.9

4.8

5.7

5.3

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

FY23 results ahead of Edison forecasts

FY23 sales of £5,489m were driven by organic growth of 6.3%. Underlying operating margin increased by 30bp or 70bp before the additional head office costs as an independent business to 6.5%, driven by the key Automotive division’s 110bp margin expansion (note: the UAW strike affected group sales by £30m and profit by £10m). This resulted in EBIT of £355m, up 10% at constant exchange rates and ahead of our forecast of £341m, adjusted PBT of £264m versus our forecast of £259m and EPS of 13.8p versus our forecast of 13.3p. The 4.2p dividend was in line with the policy of 3x cover. There were a number of exceptionals, most notably a £449m goodwill impairment associated with Powder Metallurgy, £120m restructuring costs and £42m demerger costs.

Balance sheet and share buyback programme

Net debt improved from £880m at end FY22 to £847m despite restructuring (£70m) and demerger (£48m) costs leaving net debt/EBITDA of 1.4x. Reflecting this improved position and as part of the group’s capital allocation policy, the company has announced a 12-month, £50m share buyback programme.

Outlook and forecast changes

Management expects light vehicle production to be marginally lower in 2024, hence margin progress will have to be internally driven. We maintain our expectations for divisional performance in FY24. Our forecasts changes are driven by full 12-month financing costs and head office charges as an independent company and a foreign exchange headwind (we estimate £15–20m). We have reduced our FY24 forecasts for underlying EBIT from £389m to £370m (-4.8%), PBT from £292m to £261m (by 10.5%), EPS from 14.8p to 13.3p (-9.8%) and DPS from 4.4p to 4.2p (-4.5%).

Valuation: Overly discounted

Based on a long-term growth rate of 2% and a WACC of 10%, our DCF valuation is 159p a share (previously 187p). Our peer group-based valuation, using generic peers, is 131p (average operating margins of 5.1% versus Dowlais 6.5%) and our more aspirational peer group valuation is 181p (average operating margin 9.6%).

Full year results

Overview

FY23 sales of £5,489m were driven by organic growth of 6.3%, behind the market’s c 10%, in part reflecting management’s focus on profitability rather than volume. This was highlighted by the 30bp improvement in operating margin to 6.5%, delivering EBIT of £355m, up 10% at constant exchange rates. EPS of 13.8p enabled the group to pay a dividend of 4.2p, in line with the policy of 3x cover.

The group generated adjusted free cash flow of £93m and net free cash flow of £34m, assisted by strong working capital control. Net debt was reduced from £880m at end FY22 to £847m at end FY23, with net debt/EBITDA of 1.4x.

Automotive

Organic growth was 7.0% behind the overall automotive market growth as management continued to focus on profitability, with margins expanding by 100bp (110bp at constant exchange). This was despite the negative impact of the UAW strike in North America (group impact £30m on sales and £10m on profit in H223). Restructuring continues with the Mosel, Germany and Roxboro, US plants to shut as management remains committed to the target of a 10%+ operating margin, of which two-thirds is expected to come from internal actions and the remainder from growth and associated operational gearing benefits.

Exhibit 1: Automotive division results

£m

FY20

FY21

FY22

FY23

Sales

3,806

3,756

4,223

4,437

Operating profit

82

172

250

306

Operating margin

2.2%

4.6%

5.9%

6.9%

Source: Dowlais Group

Order intake was a record £6bn, up 11% on 2022 with a book-to-bill of 1.4x. Within this, 74% is for EV platforms (69% for pure electrics or battery electric vehicles), which compares favourably with peers, as shown in Exhibit 2. Of particular note was a three-in-one eDrive system win, effectively a full powertrain system transferring and controlling torque from the motor to the wheels.

Exhibit 2: Peer EV proportion of order intake

American Axle

50%

Dana

74%

Vitesco

68%

Source: Dowlais Group

Powder Metallurgy

Revenue growth of 3.5% reflected, in part, the headwinds from the shift to EV which the business is facing along with the UAW strike impact. Margins were flat, taking into account the impact from material cost pass-throughs.

Exhibit 3: Powder Metallurgy divisional results

£m

FY20

FY21

FY22

FY23

Sales

905

975

1,022

1,047

Operating profit

39

91

96

96

Operating margin

4.3%

9.3%

9.4%

9.2%

Source: Dowlais Group

Order intake was up 23% year-on-year, with 74% either EV or propulsion agnostic. Alongside this, the group continues to develop its permanent magnet manufacturing capabilities, with a commercial agreement with Schaeffler announced in the year and a 400-tonne capacity plant to be built in 2024 and commissioned in H125. Interest from western original equipment manufacturers (OEMs) is high, reflecting the desire to reduce reliance on China, the dominant producer of magnets, both from a supply chain security issue and to benefit from government actions such as the US Inflation Reduction Act.

Cash flow

The group generated positive working capital despite higher revenues. There were a number of abnormal cash uses including demerger costs, continued restructuring and pension deficit top-ups. In spite of this, cash generation reduced net debt from £880m to £847m.

Exhibit 4: Group cash flow

£m

FY23

Operating profit

355

Amortisation including development costs/IT

10

Depreciation

253

Underlying EBITDA

618

Equity-accounted investments

(81)

Underlying operating EBITDA

537

Net change in working capital

18

Restructuring

(70)

Pension, etc

(30)

Other

(39)

Operating cash flow

416

Net interest

(63)

Dividends received (associates & JVs)

63

Total tax paid

(61)

Net capex

(262)

Underlying free cash flow

93

£m

Operating profit

Amortisation including development costs/IT

Depreciation

Underlying EBITDA

Equity-accounted investments

Underlying operating EBITDA

Net change in working capital

Restructuring

Pension, etc

Other

Operating cash flow

Net interest

Dividends received (associates & JVs)

Total tax paid

Net capex

Underlying free cash flow

FY23

355

10

253

618

(81)

537

18

(70)

(30)

(39)

416

(63)

63

(61)

(262)

93

Source: Edison Investment Research

Forecasts

Automotive production globally is expected to be marginally negative in 2024, reflecting a relatively stable end-market and some inventory reduction measures by OEMs. The lack of volume growth and operational gearing is expected to limit margin progress. Dowlais will also see higher financing charges due to higher interest rates and a negative foreign exchange impact. Exhibit 5 highlights the key changes to our forecasts, which also take into account the buyback.

Exhibit 5: Summary forecast changes

2024e

2025e

£m

Old

New

Change

Old

New

Change

Revenues

5,453

5,482

0.5%

5,572

5,612

0.7%

Normalised operating profit

389

370

(4.8%)

453

417

(7.8%)

Targeted operating profit margin (ex-central costs)

7.4%

7.0%

(0.4%)

8.2%

7.6%

(0.7%)

Normalised PBT

292

261

(10.5%)

357

302

(15.4%)

Normalised basic EPS (p)

14.8

13.3

(9.8%)

18.3

15.9

(13.4%)

Dividend per share (p)

4.4

4.2

(4.5%)

5.5

4.8

(13.5%)

Net cash/(debt)

(851)

(929)

8.8%

(755)

(875)

15.8%

Source: Edison Investment Research

Valuation

We retain the same valuation methodology as used in previous notes: an absolute DCF-based and a relative peer-based methodology.

DCF

Exhibit 6 provides a DCF-based valuation relative to key variables of the discount rate and long-term growth rates (for Dowlais, arguably the automotive market’s underlying growth). Hence, we assume 2% long-term growth and a WACC of 10%, giving a valuation of 159p/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%

101

107

114

123

134

11.0%

116

124

134

146

161

10.0%

135

146

159

175

197

9.0%

158

172

191

215

249

8.0%

188

207

234

270

325

Source: Edison Investment Research

Peer based

Exhibit 7 provides a valuation using two peer groups. Group 1 peers have an activity profile overlapping with Dowlais. Group 2 companies are premium automotive peers, primarily reflecting the higher operating margins and therefore the returns being achieved. Dowlais Group’s current operating margins are at the top of group 1, while management’s double-digit target, when achieved, will put Dowlais in the higher-quality group 2 peers.

Exhibit 7: Peer based 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

635

14.6

13.4

4.6

4.5

22.9

13.4

2.5%

3.5%

Dana

1,349

8.2

6.7

4.0

3.7

13.5

7.6

3.9%

4.4%

Linamar

2,488

4.6

4.2

2.8

2.6

7.3

6.6

8.0%

7.8%

Magna

11,897

9.2

7.7

5.5

4.9

11.7

9.5

5.1%

6.0%

Valeo

2,365

7.4

5.3

2.4

2.1

8.1

4.4

3.5%

4.2%

Vitesco

2,285

5.3

3.9

2.3

2.0

8.8

7.0

3.0%

4.9%

Average

8.1

6.9

3.9

3.5

11.5

7.9

5.1%

5.8%

Peer group 2

Autoliv

7,728

9.3

8.0

6.9

6.1

12.3

10.1

8.5%

10.9%

BorgWarner

5,770

7.6

6.9

5.3

4.9

8.1

7.3

9.4%

9.8%

Brembo

3,297

10.0

9.1

6.3

5.8

12.2

10.9

10.7%

10.9%

Average

9.0

8.0

6.2

5.6

10.9

9.4

Dowlais financials
EBIT (£m), EBITDA (£m), EPS (p)

370

417

645

697

13.3

15.9

7.0%

7.6%

Peer group 1 valuation

155

146

102

105

155

126

Peer group 2 valuation

178

173

225

214

145

150

Source: LSEG, 20 March 2024; Edison Investment Research

Overall

Our DCF valuation comes to 159p/share, our peer group 1 valuation is 131p/share and our more aspirational peer group 2 valuation is 181p/share.

Exhibit 8: Financial summary

£m

2022

2023

2024e

2025e

Year to December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

5,246

5,489

5,482

5,612

Cost of Sales

(3,937)

(4,611)

(4,550)

(4,602)

Gross Profit

1,309

878

932

1,010

EBITDA

594

618

645

697

Normalised operating profit

333

355

370

417

Amortisation of acquired intangibles

(198)

(197)

(197)

(197)

Exceptionals

(48)

(578)

(80)

(40)

Associate adjustment

(29)

(30)

(29)

(29)

Reported operating profit

58

(450)

65

151

Net Interest

(121)

(91)

(109)

(115)

Profit Before Tax (norm)

212

264

261

302

Profit Before Tax (reported)

(63)

(541)

(44)

36

Reported tax

(14)

27

4

(16)

Profit After Tax (norm)

152

198

189

219

Profit After Tax (reported)

(77)

(514)

(40)

20

Minority interests

(5)

(6)

(7)

(8)

Discontinued operations

0

0

0

0

Net income (normalised)

147

192

182

211

Net income (reported)

(82)

(520)

(47)

12

Basic average number of shares (m)

0

1,393

1,363

1,333

EPS - basic normalised (p)

(15.3)

13.8

13.3

15.9

EPS - diluted normalised (p)

(15.3)

13.8

13.3

15.9

EPS - basic reported (p)

(5.9)

(36.0)

(3.5)

0.9

Dividend (p)

0.0

4.2

4.2

4.8

Revenue growth (%)

0.0

6.3

0.6

2.2

Gross Margin (%)

25.0

16.0

17.0

18.0

EBITDA Margin (%)

11.3

11.3

11.8

12.4

Normalised Operating Margin

6.3

6.5

6.8

7.4

BALANCE SHEET

Fixed Assets

5,483

4,717

4,622

4,492

Intangible Assets

3,075

2,365

2,255

2,145

Tangible Assets

1,813

1,751

1,766

1,746

Investments & other

595

601

601

601

Current Assets

1,450

1,517

1,524

1,549

Stocks

498

510

513

524

Debtors

638

628

632

646

Cash & cash equivalents

270

313

313

313

Other

44

66

66

66

Current Liabilities

(1,472)

(1,446)

(1,586)

(1,619)

Creditors

(1,188)

(1,179)

(1,186)

(1,212)

Tax and social security

(109)

(100)

(100)

(100)

Short term borrowings

0

(2)

(100)

(100)

Other

(175)

(165)

(200)

(207)

Long Term Liabilities

(2,250)

(2,222)

(2,103)

(1,987)

Long term borrowings

(1,104)

(1,158)

(1,142)

(1,088)

Other long term liabilities

(1,146)

(1,064)

(962)

(899)

Net Assets

3,211

2,566

2,456

2,435

Minority interests

39

36

33

32

Shareholders' equity

3,172

2,530

2,423

2,403

CASH FLOW

Op Cash Flow before WC and tax

516

537

568

618

Working capital

(32)

18

10

(5)

Exceptional & other

(187)

(168)

(145)

(85)

Tax

(72)

(61)

(73)

(83)

Net operating cash flow

225

326

361

445

Capex

(219)

(262)

(310)

(282)

Acquisitions/disposals

(3)

0

0

0

Net interest

50

0

(26)

(31)

Equity financing

0

(7)

(45)

(15)

Dividends

0

(26)

(62)

(63)

Other

(1,971)

2

0

0

Net Cash Flow

1,038

33

(82)

54

Opening net debt/(cash)

(1,918)

880

847

929

Closing net debt/(cash)

880

847

929

875

Source: 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.

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

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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).

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London, WC1R 4PS

United Kingdom

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Murray International Trust — Business as usual ahead of manager’s retirement

Murray International Trust’s (MYI’s) managers are transitioning smoothly from a team of three to two, ahead of Bruce Stout’s retirement at the end of June 2024. The two remaining managers, Martin Connaghan and Samantha Fitzpatrick, have worked closely with Stout since 2001, so MYI’s shareholders can have confidence that it will be ‘business as usual’ in H224 and beyond. Regardless of the market environment, the managers strive to fulfil their objectives of generating income and capital growth higher than the rate of UK inflation and to have a covered dividend. However, in years of lower income, the board can draw on the trust’s revenue reserves, which are equivalent to more than the annual dividend payment, to enable MYI’s progressive dividend policy to continue.

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