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Research: Industrials
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.
Dowlais Group |
Motoring forward |
Preliminary results |
Automobiles and parts |
21 March 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 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* |
EPS* |
DPS |
P/E |
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 |
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
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