Castings: Revenues and Profits growing strongly. Outlook encouraging

Castings plc 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 £180m. Full year results to 31st March 2023 were released on 15th June.

We were delighted to welcome the CEO, Adam Vicary and FD, Steve Mant, to a webinar for private investors to talk about the excellent recent full year results and the prospects for 2023 and beyond . A recording of the webinar is available here.

By way of a short introduction, Castings is a foundry business which was founded in 1835 in the West Midlands and has grown over time both organically and through two key acquisitions. The current organisation is structured into three operating businesses. The original Castings business is based at the Brownhills foundry in the Midlands, the machining business is based on the same site and was acquired in 1996 and the largest foundry, William Lee, is located at Dronfield in the Peak District. Castings still melts, pours into sand moulds and machines or finishes iron castings.

The full year results to 31 March 2023 was the best performance in a number of years. The company produced and despatched 53k tonnes of product, an increase of 6.6%, the highest in its history. Revenues grew 35% to £201m and underlying revenue growth, excluding the impact of energy surcharges grew 24%. Operating profits were up 36% to £16.4m and the company ended the year with net cash of £35.6m. Confidence in the future was underlined via a total dividend of 17.35p an increase of 6.9% and the declaration of a special dividend of 15p. The dividend has now been raised or maintained for 42 years.

The company was able to pass on to customers significant increases in energy, labour and other costs. Energy cost increases of £30m were passed on in their entirety but this did have a negative impact on the percentage margin. The machine shop returned to profit and it is expected that margins will continue to improve in the current year. There were some production issues earlier in the year which had a negative impact of £500k on profits but these have now been resolved. Demand from the US was strong as was growth in non-truck operations including wind energy, truck & trailer breaking and truck & trailer coupling.

The five year financial performance indicates a company that has recovered strongly from the impact of Covid and across most metrics is hitting new highs. Revenues of £201m grew 35% including 10% from volume/mix with the remainder from price rises. Operating profit grew 36% and the margin was maintained at 8.1%. Excluding the energy surcharges the margin recovered to 8.8%, still short of the 10.1% margin achieved in 2019 but this margin is definitely now back in the aspirational area in the next couple of years. ROCE improved to 17% which is the highest in a number of years. Free cash generated during the year was £13.7m which led to a year end net cash position of £35.6m.The board believe there is good visibility into future demand growth and profitability. Consensus numbers in the market currently are for a profit before tax of £19m and year end net cash of £40m. Profit per tonne sold is now over £300 which the highest for 5 years and is heading back towards the £350/tonne achieved in 2012.

Looking at the foundry results, revenues grew 37% to £199m reflecting the growth in the heavy truck sector. Average selling price per tonne improved 28.1% and profits improved 24.4% to £16.3m. Margin fell slightly to 7.3% due to the impact of the energy surcharges being passed through to customers and without this the margin was broadly comparable with the 8.1% achieved in the previous year.

Looking at the machining division, revenues grew 7% after a very strong fourth quarter and this strong demand has continued into the current years. The division returned to profitability for the first time in 6 years and, whilst the margin overall was only 0.6%, a margin of 7% was achieved in the fourth quarter. Management are particularly confident about the prospects for higher profits from this division in the current year and into 2024. Cash generation was slightly lower than the year before due to higher levels of working capital. Capex of £1.1m was incurred and guidance of between £1-2m was given for the level of capex required in this business going forward.

Free Cash generated during the year was £13.5m as depreciation continues to be higher than capex and continuing depreciation of c£8m is expected against continuing capex of c£6m. The free cash flow funded the £13.7m paid to shareholders in ordinary and special dividends during the year.

The business is predominantly focused on the heavy truck sector which accounts for 77% of revenue with the balance from Automotive and Other. Geographically 75% of revenues are generated from European customers with the UK accounting for 17% of revenues, the US 7.5% and rest of the world 0.5%. The business is running at capacity and they are currently evaluating a capacity expansion project to meet anticipated growing demand. The biggest customers are Scania, Volvo, Daimler and Daf.

The level of European heavy truck registrations is a good leading indicator of demand and this is forecast to return to the 2019 highs in 2023. All truck customers say they are building more trucks per day and expect to increase production further in the autumn. Castings expect to produce more than 55k tonnes in the current year.

At a group level, Castings customers have shown good demand for products and new engine platforms and growth in the US suggests this will continue. Investment has been made in further robotic automation and they are trialling an AI system for product inspections. The company incurred significant cost increases across many items but were broadly able to pass these on to customers and there was some government help as they qualified as a high energy user. Increases in wages have made them a more attractive employer relative to local alternatives and recruitment issues have now disappeared. They currently expect a small reduction in energy costs in the current year.

We were reminded that Castings is a recycling organisation and uses scrap metal in the production process. Unlike many competitors they also only use electric melting. A new centralised refrigeration unit has now been installed in the machine shop and, to reduce the miles that products’ travel, Casting is now undertaking more machining inhouse. A sand reclamation project is currently being evaluated to reduce the amount of product that goes to land fill.

In summary the company is extremely busy and is expected to stay busy at least until the end of the 2023 calendar year and potentially into 2024 as well. Customers are forecasting increases in 2024, although management is more cautious about this possibility at the moment. The Scania engine is going to be sourced by MAN in 2024 so this is one area of visible growth for them. Cost increases will continue to be passed on and there will be continued investment in automation. From a M&A perspective there are opportunities in aluminium, but these transactions are hard to predict.

Some of the longer term concerns for battery electric vehicles seem to be further away at the moment and indeed there are opportunities opening up to supply more of Castings product to this end market. As mentioned earlier the company is at production capacity and is evaluating adding another line which will increase capacity by c20%.

In terms of the investment proposition, Castings offers a strong net cash balance sheet, well invested facilities for the modern truck industry, agility to make opportunistic M&A, and opportunities for good growth in the US and elsewhere. Management are very upbeat about the prospects going forward.

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