Castings: Recovering very nicely thank you

Castings P.L.C. is a market leading iron casting and machining group based in the UK, supplying both the domestic and export markets. The company is listed on the LSE main market and has a market cap of £170m. Results for the FY to 31st March 2021 were released on 16th June.

We were delighted to welcome the CEO, Adam Vicary and FD, Steve Mant, to a webinar for private investors to introduce the company, talk about how they are recovering after a tough year impacted by Covid and the improving prospects. A recording of the webinar is available here.

By way of introduction Adam started with a quick overview of the three operating businesses. The original Castings business is based at the Brownhills foundry in the Midlands, produces 30k tonnes/year and employees 380 staff. The company’s machining business is based on the same site and was acquired in 1996. The machining facilities operate 100 CNC (computer controlled) machines and employ 355 staff. The largest foundry, William Lee, located at Dronfield in the Peak District, produces 40k tonnes/year and employs 410 staff. The group produces ductile iron, SG iron, austempered ductile iron (ADI), SiMo and Ni-resist castings up to 45kg in weight. The four disamatic moulding machines and three horizontal green sand moulding machines provide a foundry capacity of 70,000 tonnes per annum.

The strategy is to deliver long term sustainable revenues and achieve higher than average margins. The aim is to achieve this through reinvesting in design and automation processes, increasing their OEM market share and improving the skills of their workforce. This is enabled by a strong balance sheet, currently £36m of net cash, which provides operational flexibility.

Underneath the strategy the company has invested in the latest automation technology to ensure that foundry production can operate at high volume with low batch sizes. Across the year there were 2,500 parts numbers and 250 parts generated over £100k of revenue each. The machine shop is well invested with a lot of automation, although currently running below capacity.

The core focus at Castings is on the heavy truck market which accounts for 71% of production, followed by cars at 11% and a combination of agriculture, rail and wind power accounts for the remaining 18% of production. Geographically, 70% of production is exported to Europe, 24% stays in the UK and 6% heads to the US. The biggest clients are Scania, Man Group, Daimler and Volvo and the likes of Ford, Toyota, Caterpillar, DAF and PSA are also customers. Another way of looking at the sales split showed that 37% of sales were to truck engines, 34% to truck chassis and 29% was non truck.

Looking at market data on heavy truck registrations, there is a strong correlation with Castings sales. Registrations fell c25% in 2020 and truck tonnes from the Brownhills foundry fell c30%. Registrations are forecast to rise c20% in 2021 and again in 2022 and this bodes well for a pickup in Castings’ revenues. One of the charts showed the pickup in volumes of product sold started in the second half of the last financial year with an 11% Q3 increase followed by a 17% Q4 increase in volumes. Management overlaid it with a view that this pickup in volumes had continued into the current financial year.

The top four customers at Castings account for 59% of sales and there are growth opportunities at each of these customers. At the largest customer more of Castings’ products have been designed into a new platform which is being used on multiple trucks. At the second largest customer Castings has developed a new sealed manifold system which has been incorporated into a new engine design. Greater penetration has been made with a US client and their US subsidiary is driving higher volumes. Finally, their fourth largest customer is bringing out a new engine in 2024 which incorporates more of Castings’ products.

Reporting on the financial performance to 31 March 2021 both sales and profits were impacted by Covid. Sales fell 17% to £114.7m and profit before tax fell 66% to £4.3m reflecting the high fixed cost nature of the business. The business was still cash generative though and net cash at the end of the year was £36.1m. The dividend was raised 2.6% to 15.26p and management reiterated the progressive dividend policy interspersed with specials where appropriate. Later on, in response to a question they indicated when cash was in excess of £20m they would normally return cash to shareholders via a special dividend, but given the current situation they considered this possibility and decided against it this year. As regards the financial performance in the current financial year the company pointed listeners towards the Arden broker note which forecasts PBT of £16m and net cash is forecast to rise to £46m. This indicates the operational leverage potential on increasing sales.

Digging deeper into the performance of 2020/2021, the analysis of H1/H2 sales and profitability indicated a substantial pick up in both in the second half of the year. The foundry business improved revenues by 76% to £78.5m and profits rose 638% to £5.9m. The machining business more than doubled revenues to £12.3m and a loss of £2.1m in the first half improved to a loss of £0.2m in H2. This H1/H2 split is clearly helping management confidence in the pick-up in performance as they move into the current year. Raw material price rises are passed onto customers with a 3-month time lag and so going into the new financial year the price rises experienced in Q4 have now been recovered. In response to a question these raw material price rises cost the company c£1m last year. More good news on the machining side is that the business was profitable on a monthly basis at the end of the last year and this has also continued into the current financial year.

The company will continue to spend £4-5m a year on capex for the next few years with 80% on growth capex and 20% on maintenance capex. The pension, which is in surplus, is expected to be bought out in the current year with some of that surplus returning to the company.

There has been some debate about the impact of electrification on Casting’s sales and this was addressed with the following points. Currently c37% of sales go into engines, so this is potential revenue at risk. There are differing views from the truck manufacturers but generally all vehicles are expected to be fossil fuel free by 2040 and the tech substitution period will last 5-15 years. There may be opportunities as competition consolidates and Castings is looking at M&A into other materials areas like aluminium. Electrification on the smaller truck sector has given them opportunities and this could account for 10-20% they might lose. There is also bracketry connected with electrification and this could make up half of the 37%. So the overall impact in 5-15 years’ time is expected to be around 15-20%. At the same time, they are developing new business around braking systems which are not impacted as much by electrification. They are also working on more wind energy projects.

Concluding the presentation, management seemed upbeat about the prospects for the company. They summarised the position as Castings is a company with a strong balance sheets that enables them to make appropriate investment in automation whilst paying a progressive dividend. There are good opportunities for growing sales from new contracts won both in Europe and in the US. They are already seeing a pick in demand.

A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com