Dowlais reported first-quarter underlying revenue of £1.3bn, down 2.5% when ignoring exchange rate impacts. This was driven by declines in both its Automotive and Powder Metallurgy divisions due to lower volumes.
Operating margin improved by 0.8 percentage points to 6.6%, with efficiency benefits from the ongoing restructuring more than offsetting the negative impact of lower volumes.
US tariffs are not expected to have a direct impact, but the associated weaker consumer demand has weighed on vehicle production forecasts for the rest of the year.
As a result, full-year results are now expected to be at the lower end of the group’s guidance ranges. These were a flat to mid-single digit decline in underlying revenue, and an adjusted operating margin between 6.5-7.0%. Underlying free cash flow is now expected to be lower than the prior year.
The shares rose 1.0% in early trading.
Our view
It’s been a tough start to the year for Dowlais, with revenues coming under pressure as the wheels of the auto industry continue to slow. With vehicle manufacturers in the eye of Donald Trump’s tariff storm, there could still be more trouble ahead. Efficiency gains are protecting profitability for now, but that’s not a long-term solution.
Against the difficult trading backdrop, Dowlais’ management is recommending that shareholders accept the deal to merge with its US competitor, AAM. The two companies would likely be better positioned to navigate the auto market's ups and downs, helped by cost efficiencies as some overlapping operations are cut.
The deal’s expected to complete in the final quarter, and would see Dowlais shareholders owning a 49% stake in the new enlarged group. Until then, progress towards tying the knot will be a key driver of investor sentiment.
Dowlais’ largest division, GKN Automotive, remains the driving force behind the group's performance. It produces drivetrain components, which are a group of parts that connect a car's engine to the wheels and other parts of the car.
The group's holds 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 manufacturers’ cars. And because of the wide variety of car manufacturers this division works with, revenues are spread across multiple geographies. This helps to diversify some risk if certain markets slow down for any reason.
The transition to electric vehicles is slowing down due to weaker-than-expected consumer demand, causing manufacturers to reduce production volumes. With so much economic uncertainty hanging over the market, not every consumer is confident enough to sign the dotted line for a new car right now, and the timing of an upturn looks far from certain. The dividend has been held for now, but the weak demand is hampering cash flows and raising questions around the viability of the 6.5% prospective forward dividend yield.
Ultimately, Dowlais has a strong market position and, in the long run, we see the electric transition as a big tailwind for the group. However, such a big change was always likely to hit a speed bump.
The current challenges are reflected by a valuation towards the bottom of the peer group, which has attracted the attention of a suitor. The shares currently trade below the value implied by the merger, suggesting there’s still work to be done to get the deal over the line. Investors should expect a bumpy ride in the near term.
Dowlais key facts
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