Supply chain strife puts brake on Castings’ growth

The chip shortage that has played havoc with new car deliveries has also affected trucks, which has limited West Midlands-based Castings’ (CGS) ability to return to pre-pandemic growth levels.

The company has rebounded strongly from the disruption experienced last year – it turned a pre-exceptional loss of £1.3m in the first six months of last year into a £5.4m profit this year as its revenue grew by two-thirds. However, pre-tax profit remains 26 per cent below the same period in 2019, while sales are still 5 per cent lower.

Castings makes 82 per cent of its revenue by casting and machining iron parts for automotive industry customers – 70 per cent are used in heavy commercial vehicles. These are produced from a pair of foundries in the Black Country town of Brownhills and in Dronfield, Derbyshire. Its original foundry dates back to 1835 and this part of the business still makes up almost 98 per cent of revenue. It employs 1,000 people.

Production disruption last year means demand for new trucks is just as buoyant as that for cars – in the first half of the year, new HGV registrations in the UK were up 130 per cent on last year, but were still 20 per cent below their five-year average as manufacturers haven’t been able to build vehicles quickly enough, according to the Society of Motor Manufacturers and Traders.

A similar dynamic is at play in continental Europe, which is Castings’ biggest market (71 per cent of total sales). In the first nine months of the year, commercial vehicle registrations were up 19 per cent year on year, but they declined in July, August and September as a result of the chip shortage, according to trade body ACEA.

The company’s cash conversion from operations remained strong, but dividend and pension scheme payments, as well as investments in property and equipment, meant its net cash positioned weakened by about £1.5m since the end of March to £34.6m. However, it is debt free.

Investments have included automation of some finishing processes and the company argued that it is well positioned to capitalise on productivity improvements both in its foundry and its machining business once volumes pick up again.

How long that will take remains a key consideration in its valuation. Payouts to shareholders have continued throughout the pandemic and the company’s shares offer an attractive dividend yield of 4.1 per cent. For this to remain sustainable, though, earnings have to increase, and until the chip shortage eases this remains unlikely. Hold.

Last IC View, Hold at 392p, 16 Jun 2021