Dowlais’ underlying revenue fell 6.1% to £4.2bn over the ten months to 31 October. The Automotive division was responsible for most of the decline, with continued weakness in its ePowertrain line (for electric vehicles) as expected. The Powder Metallurgy business suffered a smaller revenue decline due to weaker volumes than last year.
Underlying operating margin fell 0.3 percentage points year-on-year to 6.1%. But compared to the first half, margins have improved as the group leaned into cost efficiencies.
Recently downgraded full-year guidance has been maintained. Underlying revenue is expected to fall by mid-to-high single digits, and underlying operating profit is set to land in the 6-7% range.
The shares rose 13.9% in early trading.
Our view
Dowlais’ revenue and profits continue to fall due to weaker demand for electric vehicles. But the rates of Dowlais’ declines held up better than the broader sector, and markets reacted positively to that news on the day.
Its 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 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 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.
With the switch to electric vehicles (EVs) looking inevitable, we think Dowlais could be a major long-term beneficiary of the transition due to its market-leading positions in the EV space. 2023’s automotive orders climbed to record levels worth more than £6bn over the contract lifetimes, with a mammoth 74% of this being EV-related. However, that pace has slowed so far in 2024. 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.
That means the timing of an upturn looks far from certain, and sentiment is likely to remain weak for the immediate future.
The Powder Metallurgy business accounts for around a fifth of group revenue. It specialises in turning powdered metals into high-precision components. However, it’s potentially up for sale. Its revenue continues to hold up better than the automotive division. So management needs to ensure that any price negotiated compensates shareholders for the negative impact a disposal is likely to have on group financial performance.
Elsewhere, the group has made some impressive efficiency gains, but the dip in demand is putting cash flow under pressure. The dividend has been held for now but, with cash allocation priorities under review, there are some question marks around the viability of the 8.8% 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. With ongoing volatility amongst the customer base there could be more ups and downs ahead.
Dowlais key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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