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Dowlais - profits rise, full-year guidance intact

Dowlais' first-half underlying revenue came in at £2.8bn, up 10% ignoring the impact of exchange rates.

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Dowlais' first-half underlying revenue came in at £2.8bn, up 10% ignoring the impact of exchange rates. This was largely driven by the Automotive division which saw growth across all regions.

Underlying operating profit rose from £127m to £177m, helped by margin improvements as volumes increased and improved pricing which fully offset inflationary headwinds.

Underlying free cash flow improved to £33m, compared to an outflow of £29m. Net debt of £849m was better than management's expectations.

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

An interim dividend of 1.4p per share has been announced. Dowlais' annual dividend policy aims to pay out 30% of underlying post-tax profits to shareholders.

The shares fell 5.7% following the announcement.

View the latest Dowlais share price and how to deal

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, has continued to be 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 management expects that figure to rise further as EV ownership picks up.

The Powder Metallurgy business accounts for around 20% of group revenue. 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. 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 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: 12th September 2023