Morning Note: Market news and an update on auto components company Dowlais.

Market News

The FOMC left rates US interest rates on hold but reiterated its outlook for three 25 basis points cuts this year, although they see one less reduction in 2025. Fed Chair Powell said recent high inflation readings haven’t changed ‘story’ of slowly easing price pressures. The FOMC may start easing the pace of QT “fairly soon.” The median rate forecast for 2025 rose from 3.6% to 3.9%. The dollar slipped, while gold soared to a new high above $2,200 an ounce. The 10-year Treasury currently yields 4.25%.

US equity markets also pushed higher in response – S&P 500 (+0.9%), Nasdaq (+1.3%) – with the buoyant mood continuing in Asia this morning: Nikkei 225 (+2.0%); Hang Seng (+1.9%); Shanghai Composite (flat). In Japan, exports rose 7.8% in February from a year earlier, exceeding estimates, led by auto shipments. And the benchmark repo rate turned positive for the first time since 2016.

The FTSE 100 is currently trading 1.2% higher at 7,812. Stocks trading ex-dividend today include BAT (2.46%), Pearson (1.56%), and Schroders (3.95%). The Bank of England is expected to keep UK interest rates unchanged today. Sterling trades at $1.2770 and €1.1711. Brent is $85.84 a barrel.

Apple fell post-market on news that the DOJ is poised to sue the company, accusing is of violating antitrust laws by blocking rivals from accessing hardware and software features of its iPhone.

Source: Bloomberg

Company News

Dowlais has this morning released its maiden full-year results which were slightly better than expected. Free cash flow was strong and in response the company has initiated a share buyback programme. The shares have been weak over the last year and are down slightly 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 2023, adjusted revenue grew by 6.3% at constant currency to £5,489m, driven by volume growth in Automotive and inflation recoveries across the group. As expected, second-half demand was impacted by strike action by UAW members in the US, albeit the £30m hit was at the lower end of expectations.

Operating profit grew by 10% to £355m, slightly above the company-compiled consensus of £352m, with the UAW strike impacting by £10m. The margin rose by 30 basis points to 6.5%, driven by volume growth, operational efficiencies, and improved commercial pricing with customers, fully offsetting inflation. Excluding the incremental stand-alone plc costs of £32m, adjusted operating profit grew 20% year-on-year and margins increased by 90bps.

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 2023, revenue grew by 7% at constant currency to £4,437m, driven by increased volumes from the market recovery, new business wins, and improved pricing including inflation recovery. The business generated a strong operating margin expansion, up 110 basis points to 6.9%, with operating profit up 27%. The division enjoyed record bookings, with a forecast lifetime revenue of over £6bn, 74% 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 2023, revenue in constant currency was up 3.5% to £1,047m, driven by strong inflation-recovery through pricing and flat year-on-year volumes. The market under-performance was largely driven by the EV transition headwinds, engine downsizing, and the impact of the UAW strikes. This business continues to transition its portfolio with 72% of new business wins being for EV or propulsion agnostic products. Adjusted operating profit grew by 3.1%, resulting in an adjusted margin of 9.2%. A full review of the medium-term trading prospects of Powder Metallurgy has resulted in a non-cash goodwill impairment charge of £449m. The group has also appointed a new CEO to lead the business. In the short to medium term, the group expects steady performance and will continue to focus on accelerating change to realise the long-term financial potential of this market-leading business.

The group generated free cash flow of £45m, including non-recurring costs of £48m related to the demerger. This was better than management expected despite significant investment in organic growth, new production facilities, and executing ongoing restructuring programmes. As a result, net debt ended the year at £847m with a reduction in leverage to 1.4x net debt to EBITDA, within the target range of 1.0x to 1.5x.

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 a 2023 of 4.2p, equating to a yield of 4.7%. With cash flow above expectations and management confident in long-term outlook, the group has announced its intention to commence a share buyback programme of up to £50m over a 12 month period commencing in April 2024.

Looking forward, current industry forecasts imply a slight decline in global light vehicle production in 2024. Based on these external forecasts and the group’s current order book, Dowlais expects its revenue will be similar to the prior year, at constant currency, with a modest reduction in the first half offset by an improvement in the second half due to the expected timing of several new programme launches. On this basis, and with its strong continued focus on operational efficiencies, the group expects to further expand operating margins and grow free cash flow in 2024. The company remains confident of achieving its margin target of 10%+ in Automotive over the medium term, largely underpinned by announced restructuring.

Source: Bloomberg