Dowlais hit by £449mn impairment

Specialist engineer Dowlais (DWL) has been dragged into a £450mn operating loss by a major goodwill impairment. The group – which was spun off from Melrose Industries (MRO) last year – has reported a £449mn impairment charge relating to its powder metallurgy division, following a review of its medium-term prospects. The group was further hampered by £120mn of restructuring costs in the automotive business.

The powder metallurgy business is clearly under pressure, with revenue edging up by just 2.4 per cent to £1.0bn and adjusted operating margins dipping from 9.4 per cent to 9.2 per cent. The market underperformance was attributed to electric vehicle transition headwinds, engine downsizing and the impact of auto worker strikes in the US. A new divisional chief executive has now been appointed. 

Elsewhere, however, the business is performing strongly. The bigger automotive division grew sales by 5.1 per cent to £4.4bn and boosted its adjusted operating margin by a whole percentage point to 6.9 per cent. This pushed the group’s total adjusted operating profit – which excludes the goodwill impairment and other one-off costs – up by 6.6 per cent to £355mn. 

Management certainly seems to be feeling confident, announcing a full-year dividend of 4.2p and a share buyback of up to £50mn.

The outlook for 2024 is mixed. Current industry forecasts imply a slight decline in global light vehicle production this year, and Dowlais is expecting revenues to stay flat. A “modest” reduction in the first half is due to be offset by an improvement in the second half, as a result of several new programme launches. Internal improvements are expected to boost margins and free cash flow, however.

In the longer term, the global automotive market is expected to grow, with a forecast increase in global light vehicle production of 5 per cent between 2023 and 2028. Meanwhile, 2023 was the automotive division’s best ever year for new business wins. For now, however, there are too many one-off costs and unresolved issues within the metallurgy business for us to feel confident enough to buy in. Hold.

Last IC View: Hold, 122p, 12 Sep 2023