Market news and updates from Dowlais and AB Foods.
Market News
US equity markets moved higher last night – S&P 500 (+0.7%); Nasdaq (+1.1%) – lifted by the mega-caps. Tesla jumped on a Morgan Stanley upgrade. The 10-year Treasury currently yields 4.29%, while gold is $1,920 an ounce. This morning in Asia, markets were mixed: Nikkei 225 (+1.0%); Hang Seng (+0.1%); Shanghai Composite (+0.2%). The FTSE 100 is currently trading 0.3% higher at 7,522.
The UK unemployment rate edged up to 4.3% in the three months through July, from 4.2% previously, in line with expectations. Growth in average weekly earnings rose to 8.5% from a revised 8.4%, well above forecasts of 8.2%. Bank of England policy-maker Mann signalled support further rate hikes to combat inflation. Sterling currently trades at $1.2498 and €1.1651.
Oil held near its highest level this year – Brent Crude is $91 a barrel – ahead of OPEC and EIA monthly reports that may offer further insight into the market’s balances. The FT reports that the IEA believes the global demand for oil, natural gas, and coal is expected to peak before the end of 2030.
The UK’s failed auction for offshore wind projects was shocking, but not surprising, Lara Williams writes. Industry execs had warned about the dangers of setting guaranteed prices too low to attract bidders. The government’s deafness threatens Britain’s climate targets and its leadership in sea-based renewable energy.
Arm’s bankers plan to stop taking orders for its IPO this afternoon as the offering is already 10 times oversubscribed, people familiar said. The order book will be closed a day early, but the chip designer still plans to price its shares tomorrow.
Source: Bloomberg
Company News
Dowlais has this morning released its first-half results. Trading was ahead of management expectations, although full-year guidance has been maintained. The shares were up 5% yesterday in anticipation of a good update but that has reversed in early trading this morning.
Dowlais is a global leader in automotive equipment and powder metallurgy. It is well placed to benefit from several structural growth drivers, such as stricter environmental legislation and the electric vehicle transition. Following the demerger from Melrose in April 2023, the company has a dual strategy of profitable organic growth and targeted M&A in the automotive sector where management sees opportunities as a consolidator.
In the first half of 2023, adjusted revenue grew by 10% at constant currency to £2.83bn, a slightly faster pace that the 9% growth generated in the first four months of the year. The group saw strong new business bookings, with 2023 bookings at target margins.
Operating profit grew by 40% to £177m, with the margin up by 140 basis points to 6.3%, driven by vehicle production volume increases, operational efficiencies, and improved commercial terms with customers, fully offsetting the impact of inflation. Excluding the incremental stand-alone plc costs of c. £15m, adjusted operating profit grew 52% year-on-year and margins increased by 190bps. Management is confident in achieving adjusted operating margin expansion (pre-central costs) in the full year. The target is to generate a margin above 11%.
In Automotive, the group is the number one global drive system supplier, serving 90% of global OEMs, with content on 50% of vehicles. The long-term aim is to grow at a rate of more than double global light vehicle production. In the first half, revenue grew by 12% at constant currency to £2.3bn, driven by increased volumes from the market recovery, new business wins, and improved pricing including inflation recovery. The business generated a significant operating margin expansion in the period, up 270 basis points. The division enjoyed record bookings, with a forecast lifetime revenue of over £3bn, the vast majority of which is related to battery electric vehicle (BEV) platforms, underlining the group’s strong market position as the transition to electrification continues.
In Powder Metallurgy, the group is a market leader in both metal powders and sintered components. In the first half, revenue in constant currency was up 2%. The business was driven by higher pricing to recover inflation, with volumes impacted by the accelerating EV transition, operational issues in the US, exiting poor margin business and the closure of a facility in 2022. The unit expanded its EV portfolio, notably reaching a commercial agreement for the supply of magnets for the EV market after the period end. Operating margins fell 110 basis points, reflecting some operational challenges in the US which have been remedied. Encouragingly, margins increased substantially in the second quarter and from H2 2022.
The group generated free cash flow of £33m, better than management expectation despite significant investment in capital expenditure and restructuring to support future growth and productivity. Net debt ended the half at £849m with a reduction in leverage to 1.4x net debt to EBITDA from a pro-forma position of 1.5x as at the date of demerger. The group is targeting a sustainable and progressive annual dividend of approximately 30% of adjusted underlying profit after tax and with today’s results has declared an inaugural interim payment of 1.4p.
The group is well positioned to benefit from the wider market recovery, due to its market leading positions, global presence and operational agility, which have allowed the company to effectively respond to increases in customer demand. The statement highlights that the positive first-half trading, ahead of management expectations, would ordinarily have led to an increase in the full-year outlook. However, second-half demand is uncertain due to the proposed strike action by UAW members in the US and, as a result, full-year expectations remain unchanged.
Source: Bloomberg
Associated British Foods has this morning released a trading update for the financial year to 16 September 2023, which is slightly better than previous expectations, with operating profit now expected to be moderately ahead of last year. In response to today’s update, the shares are up 2%.
ABF is a diversified international food, ingredients, and retail group with sales of £17bn. It has significant businesses in Europe, Africa, the Americas, Asia and Australia, including value fashion retailer Primark, enzyme and yeast products, sugar, Twinings, Ovaltine, and other agricultural products. The group’s capital allocation policy is to invest in its businesses at an appropriate pace and wherever attractive returns on capital can be generated.
In the Food businesses, the group continues to see strong sales growth, particularly in Grocery and Ingredients and a slightly better-than-expected performance in Sugar. Adjusted operating profit is now expected to be strongly ahead of the previous financial year.
In Retail, Primark sales are expected to be around £9.0bn, 15% ahead of sales last year with like-for-like (LFL) sales growth of 9%. In the final quarter, LFL growth was 8%. Sales growth has been driven by selective price increases, well received ranges and strongly performing new stores. Second half adjusted operating profit margin expected to be slightly below 8% and for the full financial year to be around 8%.
As expected at this stage, there is no update on the group’s financial position. However, ABF is financially strong with good cash generation and substantial liquidity. The group is currently undertaking a £500m share buyback programme, with £442m repurchased so far.
Looking forward to the new financial year, the group continues to trade well, managing inflation, recovering cash margin and continuing to drive sales in a challenging macro-economic environment. The group still expects Sugar to make a substantial improvement in profitability in the next financial year. This will be driven by a marked improvement in the performance of British Sugar, driven in part by an anticipated better UK sugar beet crop.
At Primark, the group continues to expect a substantial recovery in gross margin because of lower material costs, the weakening of the US dollar against sterling and the euro, and lower freight costs, all of which have improved in recent weeks. Primark adjusted operating profit margin is expected to recover strongly in the next financial year.
Source: Bloomberg