Castings declares special dividend

Since the pandemic, Castings (CGS) has been hampered by a truck-building slowdown, caused by a global shortage of chips. However, the group – which makes iron parts for vehicles from a pair of Black Country foundries – is finally back in the driving seat.

Management said demand from customers has been “very strong”, with heavy truck OEMs (original equipment manufacturers) increasing their build rates throughout the year. The foundry businesses, which generate the lion’s share of group revenue, increased their output by 6.6 per cent to 53,100 tonnes and grew external sales revenue by 37 per cent to £199mn.

Cost pressures remained intense in the period. Management reported “very significant” price increases in raw materials and energy, which caused the foundry division’s profit margin to shrink from 8 per cent to 7.3 per cent. Things were made even trickier by a skew towards certain product lines: customers were asking for more complex, machined parts, which in turn led to some inefficiencies. 

However, management said the inefficiencies are “largely behind us” and has negotiated further price increases with customers to address last year’s margin erosion. It’s also important to remember that Castings still achieved excellent growth in the period, increasing pre-tax profit by 38 per cent to £16.7mn. 

As such, the company has announced a special dividend. Together with hiking the ordinary dividend by 7 per cent to 17.35p per share, directors have recommended a supplementary payout of 15p per share, to be dished out on 26 July. 

This has not come at the expense of investment in the business, however: capital expenditure amounted to £6.2mn in the period, up from £4.4mn in 2022, and included investment of £0.8mn in a foundry moulding line automation project as well as other automation and productivity enhancements. 

Change is coming for Castings, as Brian Cooke stands down as director after nearly 63 years at the company, 40 of which as chair. However, the group looks resilient and well placed for growth – particularly given that it has no debt on its balance sheet. For now, however, we remain wary of input cost pressures, and note that the group is trading on a slightly higher price/earnings multiple than it has in the past (13.4 versus a five-year average of 12.7). Hold.

Last IC View: Hold, 360p, 17 Nov 2022