Higher volumes boost Castings' returns

When a company’s chairman summarises its most recent trading period as “another difficult year”, you know that things haven’t exactly gone to plan.

This was certainly the case for Castings (CGS), a business that makes most of its money casting and machining parts for truck makers. Alongside the semiconductor shortage affecting demand, it has had to contend with a hike in energy costs and staff shortages.

Still, things were better in the year to March than in the previous 12 months, with a 24 per cent increase in output at its foundry business contributing to a 30 per cent growth in its top line. Operating profit more than doubled to £12mn, mainly due to the recovery in volumes and a 4.7 per cent uplift in prices. Further price rises will be implemented after its current electricity supply contract ends in September, with customers already informed of its intention to pass through costs.

Castings’ improved performance allowed it to increase its full-year dividend by 6 per cent to 16.23p, as well as offer a 15p supplementary dividend – news of which contributed to a 24p increase in its share price.

This still makes the shares undervalued, house broker Zeus Capital argues. It says Castings is cheap relative to peers at around 11 times forecast earnings per share of 28.2p for its current financial year. This is a 44 per cent jump on last year, which assumes double-digit price increases to mitigate higher costs and a 2.5 per cent uplift in volumes.

Truck makers are still struggling to source chips, though, with UK HGV registrations down 2.3 per cent in the first quarter. We maintain our hold recommendation until signs of a recovery in its end markets are clearer. Hold.

Last IC View: Hold, 373p, 12 Nov 2021