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Dowlais - full-year guidance on track despite strike action

Dowlais' underlying revenue grew 4.7% to £1.8bn in the four months to 31 October.

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Dowlais' underlying revenue grew 4.7% to £1.8bn in the four months to 31 October. The Automotive division's underlying revenue rose 4.8%, while there was 4.2% growth in the Powder Metallurgy division.

Underlying operating margin increased by 1 percentage point to 6.8%, excluding PLC costs. The margin improvement was a result of increased volumes which more than offset the negative impact of inflation and United Auto Workers (UAW) union strikes in North America.

The Automotive division recorded £2.4bn of new orders in the four-month period, bringing the annual order intake up to a record £5.4bn, with two months still to run.

Full-year guidance remains unchanged, with underlying operating margins expected to rise over the year. The market's forecasting full-year underlying operating profit of £352m. The group also expects to reduce its net debt levels by year-end.

The shares were broadly flat following the announcement.

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Our view

The demerger from Melrose earlier this year marked 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 largest division, GKN Automotive, remains the driving force behind the group's improved performance. 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. EV-related bookings accounted for more than 78% of the division's total orders in the first half, and since then, order intakes have almost doubled to an annual record of £5.4bn.

The Powder Metallurgy business accounted for around 20% of group revenue at the half-year mark. It specialises in turning powdered metals into high-precision components. This should complement the EV transition, but performance has been disappointing so far, with margins and profits both heading in the wrong direction.

There are other challenges to be aware of too. 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. Strike action in the US is expected to cause a £10-15m drag in underlying operating profit this year. A tentative agreement is now in place which should limit further damage if rubber stamped.

Elsewhere, the group's made big strides in restructuring the business in recent years and cash flows have returned to positive territory. Continued progress on this front will likely put potential merger and acquisition (M&A) opportunities on the table. That's a key part of the group's growth strategy, so don'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: 9th November 2023