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Dowlais - automotive steering performance in the right direction

In the four months to the end of April, Dowlais' underlying revenue rose 9% to £1.9bn, ignoring the effect of exchange rates.

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In the four months to the end of April, Dowlais' underlying revenue rose 9% to £1.9bn, ignoring the effect of exchange rates. The Automotive division helped drive this uptick, with 11% growth as its Europe and US markets performed well. Powder Metallurgy revenues were flat year-on-year.

Underlying operating margins were up two percentage points on the prior year, helped by "significant" margin expansion in the Automotive division.

Automotive bookings were "healthy" in the period, with the majority of new orders relating to electric vehicles.

Full-year expectations remain unchanged, with underlying operating margin expected to rise over the year.

The shares rose 2.2% following the announcement.

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Our view

The recent demerger from Melrose marks the start of a new chapter for Dowlais. The two have now become separate, publicly listed companies - with Dowlais retaining ownership of the Automotive, Powder Metallurgy and Hydrogen businesses.

The group's shifted its strategic focus away from chasing volumes, to now being more selective in its contracts. Inflated costs continue to be mitigated through a combination of price hikes and cost-cutting measures, which are helping to move margins in the right direction.

The largest division, GKN Automotive, continues to perform well. It produces drivetrain components, which are effectively a group of parts that connect a car's engine to the wheels and various other parts of the car to help drive it into motion.

The group's got market-leading positions on many of these components. It serves around 90% of global car manufacturers, with the group's parts finding their way onto around half of these manufacturer's cars. And because of the wide variety of car manufacturers this division works with, revenues are spread across multiple geographies which helps to diversify some risk if certain markets slow down for any reason.

With the switch to electric vehicles (EVs) looking inevitable, we think Dowlais could be a major beneficiary of the transition due to its market-leading positions in the EV space too. Its EV-related bookings accounted for more than 40% of the division's total orders in 2022, and that number's likely to rise given EV-related orders have continued grow this year.

The Powder Metallurgy business brought in revenues of around £1.0bn last financial year - accounting for around 20% of group revenues. It specialises in turning powdered metals into high-precision components. This should complement the EV transition, but performance across the first four months of the year has been underwhelming, with revenues and margins flat against the prior year.

There are other challenges to be aware of though. With so much economic uncertainty hanging heavy over the market, not every consumer's confident enough to sign the dotted line for a new car right now. Historically, Automotives hasn't been a great place to hide in a downturn. So if a recession strikes, it could have serious knock-on effects for Dowlais given Automotives are such a big chunk of its revenues.

Elsewhere, the group's made big strides in restructuring the business in recent years and cash flows are now in a much healthier place. Continued progress on this front will likely put potential merger and acquisition (M&A) opportunities on the table, and we wouldn't be surprised to see some activity on this front in the coming years.

Ultimately, Dowlais has strong market position, with the electric transition likely to be a big tailwind for the group. If volumes fully recover to pre-pandemic levels, we expect to see margins increase further from their current modest levels. But any economic downturn has the potential to put a spanner in the works. That caution looks to be built into the valuation, which is towards the lower end of its peer group on a price-to-earnings basis.

Dowlais key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 23rd May 2023