Castings’ earnings growth driven by truck demand

The surge in inflation being reported this time last year – to what by today’s standards seems like the relatively benign rate of 5.1 per cent – had many inputs, but transport played a big part.

A truck driver shortage was in full swing, with the government intervening by relaxing working hours rules, providing extra visas for foreign drivers and investing £34mn in a series of HGV skills bootcamps to train 11,000 more people.

This has eventually fed through into more demand for trucks. The number of HGVs registered in the UK rose by over 30 per cent to 10,034 in the three months to September – the best third quarter in five years, according to the Society of Motor Manufacturers and Traders.

This is great news for Castings (CGS), the West Midlands-based iron castings and machining company. About 70 per cent of its customers are in the commercial vehicle supply chain.

These interim results show its top line grew as more forward orders converted into sales, with the introduction of new engine ranges by two big truckmakers leading to greater demand for parts.

Its operating margin also improved by 86 basis points to 8.6 per cent, which house broker Zeus Capital said represented a return to pre-Covid levels following investments made in the business to improve efficiency.

It argued that the shares are “significantly undervalued” at 13 times forecast earnings per share of 28.2p for the year to March, especially given “resilient” demand.

How long this perseveres is one concern, though – supply had been constrained by a shortage of semiconductors, which has now eased. Another is what happens to the company’s energy costs if government support measures end as expected next March. Hold.

Last IC View: Hold, 373p, 12 Nov 2021