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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 £150m. Full year results to 31st March 2022 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 how they are performing in the current environment. A recording of the webinar is available here.
Castings is a modern business built on foundations which were established back in 1835 and still melts, pours, moulds and machines iron castings. The company is structured into three operating businesses. The original Castings business is based at the Brownhills foundry in the Midlands, produces 30k tonnes/year and employs 390 staff. The company’s machining business is based on the same site and was acquired in 1996. The machining business, CNC Speedwell, operates over 100 CNC computer-controlled machines and employ 350 staff. The largest foundry, William Lee, located at Dronfield in the Peak District, produces 4s0k tonnes/year and employs 441 staff. The group produces ductile iron, SG iron, austempered ductile iron (ADI), SiMo and Ni-resist castings up to 45kg in weight. There is foundry capacity of 70,000 tonnes per annum from a mix of high volume and specialist lines.
The business is predominantly focused on the heavy truck sector which accounts for 70% of revenue. Within this, 33% is generated by engine components and 37% by chassis components. The biggest customers are Scania, Volvo, Daimler and Daf. Daimler is the fastest growing of these and Scania has fallen a little recently due to problems Scania have had sourcing semiconductors. Automotive accounts for a further 12% of revenue and the balance of 18% comes from a mixture of agriculture, rail and wind power. Geographically 71% of revenues are generated from European customers with UK accounting for 21% of revenues and the rest of the world 8%. The RoW segment has increased from 3% over the last three years driven by the growth in US sales.
Looking back over the year the first quarter started well with volumes back to pre-covid levels, then in the second quarter scheduled production levels were not achieved due to customer supply chain issues before a steadier production level was resumed in the second half which improved production efficiency although also led to higher levels of stock and working capital.
All in all though it was a good year for the company. Revenues recovered to £148.6m up 30% and almost back to the peak achieved in 2019. Margins also recovered strongly to 8.1% and comments from management suggest there is further margin improvement to come, with 10% talked about in the Q&A as being more than achievable. The dividend was increased 6% and this follows a pattern of steady dividend increases over the last 20 years. There was an additional return to shareholders of 15p as the company also reported a very strong balance sheet with £36m of net cash. The company has a progressive dividend policy and has only failed to raise the dividend twice in the last 20 years with no reductions during that period. There have also been 3 special dividend payments in 2016, 2019 and 2022 and it would be no surprise if there were more specials in the future.
The company follows truck registrations closely as these are a key indicator of demand. Truck registrations in 2021 were still below the highs of 2018 and 2019 but are forecast by Volvo to rise by c10% in 2022. This is one of the reasons management are optimistic about the future.
Looking deeper into the Foundry segment there was both an increase in foundry sales weight to 49,800 tonnes and an increase in the average selling price per tonne of 5%. The ASP rose due to recovery of higher input costs and an improved product mix with more products being machined. The trend in higher levels of machined work temporarily stalled in 2022 but is expected to rise again in 2023. This resulted in margins improving from 5.4% to 8.1%. Peak margins of 11.3% were achieved in 2017 and management believe that margins have further to rise from here.
The machining business now predominantly services the group customer base and also recovered during the year growing revenues 23% and reducing the loss to £1.8m. This division though suffers from high fixed costs and really needs to improve utilisation to move into profitability. There were sufficient volumes in the first quarter to generate a 6% margin but lower volumes in the rest of the year meant the division lost money overall. A lot of money has been invested in automated robotic equipment in the machining division which generates a high depreciation charge, so on a cash basis the division generates cash. With continued improvement this business could generate good margins too.
Looking at cash flow ongoing capex is estimated at £4-5m, working capital built up during the year but is expected to reverse and there was a pension payment from Aviva. The pension will be fully bought out in the current year and this may mean some additional funds are returned to the company.
The outlook was split into short, medium and long term projections. In the short term there is significant pent-up demand from customers and production schedules are seeing large increases. Castings expects to be very busy over the next 6-12 months barring any unforeseen supply chain issues. There have been a number of new business wins at the likes of Volvo and Scania and Castings have also won more business on the new models coming out. They are also benefitting from new business from battery EV Trucks where they have bracketry components.
In the medium term there are more positives with a Scania engine which contains a number of Castings components also been deployed onto some DAF trucks. They are also winning increased volumes from truck & trailer couplings which are popular in continental Europe. They are exploring expanding into Aluminium and have come close on a couple of M&A transactions. If M&A is not successful the organic route to enter the Aluminium market is being considered and might cost £5m to set up the first line.
In the longer term there is a recognition that there will be more electric trucks. If it came today, it would impact sales by 30% but the transition is likely to take at least 2 decades. There is currently no BEV solution for Heavy Trucks. The eventual electrification is giving management less sleepless nights as there are also new opportunities too that they can work on.
Adam reminded us that Castings takes its sustainability obligations seriously. The company only uses scrap metal in the production process. This is where your old fridge goes to! The company also made the move to electric melting many years ago unlike some of the competition. Increasing the amount of work that is machined in house reduces supply chain miles and many customers are looking to source more locally in Europe as opposed to Asia.
In summarising the investment proposition Adam talked about the strong net cash balance sheet, well invested facilities, a fully funded pension which would be off the balance sheet soon, a progressive dividend policy and agility to move quickly to make the most of the changing landscape. The possibility of achieving £20m of profits was mentioned in the short term which would show significant growth on the £12m just reported. Its understandable why management are clearly on the front foot again.
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