Castings a serious doubt

In 2018, Castings extended the lifespan of CNC's recently acquired plant and machinery items from 10 to 15 years, which had the welcome effect of adding £0.5m to first-half profit through a corresponding reduction in the depreciation charge. Investment in the machining operation was reduced from £2.7m to £1.3m in the half although the foundry business still needed to £2.3m in first-half productivity initiatives. It is pinning its hopes on automation as the main cure to its productivity problems. So Castings is planning on making existing machinery work for 50 per cent longer, while bringing new technology into play. The company partly blamed inefficiency-led profit decline in the foundry shop on “the introduction of new production processes”.

Castings is also being disrupted by changes to the market and the expectations of customers, who now want to buy a finished or semi-finished parts. We’re far from confident that Castings is operationally adept enough to keep up with the pace of change while addressing its existing struggles. Brexit uncertainty threatens to undermine its recovery, too. Ninety-seven per cent of its revenues were generated across the UK, Sweden, the Netherlands and the rest of Europe in its last full year.

Over the last two years, problems have been reflected in a sharp decline in operating margin (from 14.7 per cent in 2016 to 8.9 per cent last year), and return on year-end capital employed (15.2 per cent to 9.0 per cent). Meanwhile, rising levels of stock and debtors (amounts owed to Castings) to sales since 2016 points to a deteriorating balance sheet (see graph). Working capital increases as well as capital spending on productivity improvements been reflected in a fall in net cash from £40m at the end of March 2016 to £20m at the end of September 2018, although a good chunk of this is explained by the payment of a £13.1m special dividend.