Dowlais buoyed by new business prospects

You could say that Dowlais Group (DWL) came into being after Melrose Industries (MRO) decided to abandon its status as a “turnaround” specialist. In truth, the group’s latest incarnation can be traced back to 2018, and Melrose’s marquee deal to acquire GKN, one of the UK’s oldest engineering firms. At the time of the deal, a parliamentary committee grilled Melrose’s bosses about the future of the UK engineering industry and national security implications – concerns that have subsequently become all too familiar given private equity raids on the defence sector.

At any rate, the view took hold that Melrose may have underestimated the challenge posed by the GKN integration – “too many moving parts” in both the literal and figurative sense. Matters certainly weren’t helped by the pandemic, but the formation of a more streamlined group model was probably inevitable, which is somewhat ironic given that critics of the original hostile takeover had branded Melrose as an “asset-stripper”. So, a year ago, Melrose took the decision to separate GKN’s automotive and smaller powder metallurgy businesses from its aerospace arm.

It may be too early to make an informed assessment of how the newly demerged group is progressing, but its maiden half-year returns indicate that volumes at GKN Automotive – the largest segment by revenue - are increasing as the switch to electric motoring gathers momentum. Unfortunately, the Powder Metallurgy business has suffered by comparison, with the adjusted operating margin down 110-basis points to 9.2 per cent as profitability was constrained by operational issues in the US, although the rate was in recovery mode through the second quarter. Overall, group adjusted operating profit came in at £177mn, an increase of 40 per cent.

Perhaps the most laudable feature is that both segments saw strong new business bookings, with Automotive achieving contract nominations worth more than £3bn, while a book-to-bill ratio of 1.3 demonstrates that orders are outstripping completed deliveries – a possible sign that industry supply side issues have eased to a significant degree. Meanwhile, Powder Metallurgy registered a 36 per cent year-on-year increase in booking values. Management therefore takes the view that “new bookings for both businesses are at a profitability level which supports margin objectives”.

There was some joy for shareholders. The group declared an inaugural interim dividend of 1.4p a share and is targeting a progressive annual dividend of approximately 30 per cent of adjusted underlying profit after tax. Full-year expectations are unchanged, although the group flagged potential industrial action by US autoworkers as a possible near-term stumbling block. We are reluctant to make a definitive call given the limited timeframe, but the group is trading at a sizeable discount to book value – perhaps worth a second look. Hold.

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