Morning Note: Market news and a robust trading update from Dowlais

Tuesday 23rd May 2023

Market News?

As debt talks continued, the S&P 500 was flat last night, with a strong showing from tech stocks: Nasdaq (+0.50%). This morning in Asia, markets drifted lower: Nikkei 225 (-0.4%); Hang Seng (-0.9%); Shanghai Composite (-1.1%). The FTSE 100 is currently little changed at 7,771. Brent Crude edged up to $75.90 a barrel, while gold declined to $1,959 an ounce.

Kevin McCarthy said he and Joe Biden had a productive talk but haven’t yet reached a deal to avert a debt default. “We reiterated once again that default is off the table,” Biden said. The speaker expects to talk daily with the president until a deal is done, though he stressed the GOP won’t agree to tax changes. Janet Yellen warned it’s now “highly likely” her department will run out of sufficient cash in early June.

The UK government borrowed more than expected in April. Public sector net borrowing, excluding banks, stood at ￡25.6bn, versus ￡19.1bn expected, as strong tax receipts were outweighed by energy support schemes and higher debt interest payments. Sterling moved to $1.2411 and €1.1491.

The au Jibun Bank's PMI of activity in Japan’s services sector rose 0.9 to a record 56.3 and the reading in manufacturing added 1.3 to 50.8, rising above the 50 mark that separates a contraction from an expansion for the first time since October 2022.

Olaf Scholz and Christian Lindner are thrashing out a plan to close a €20bn shortfall in Germany’s 2024 budget with outlay cuts in all departments except defence — a move which risks angering their coalition partners, the Greens. Scholz and Lindner have agreed to spending reductions of 2% to 3% for almost all ministries, people familiar said. That’s enough to deliver about half of the savings required. They’re still working on the rest.

Company News - Dowlais

Dowlais has this morning released a robust trading update and left its full-year expectations unchanged. Despite enjoying a strong run over recent days, the shares are up 2% in early trading.

Dowlais is a global leader in automotive equipment, powder metallurgy, and hydrogen. 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 2022, the company generated adjusted revenue of ￡5.2bn. Strong operational performance and the achievement of the planned benefits of restructuring projects meant the group successfully offset the full inflation headwinds, with the operating profit margin rising by 90 basis points to 6.3%. The target is to generate a margin above 11%.

In the four-month period to 30 April 2023. The group delivered ￡1.9bn of adjusted revenue or 9% growth at constant currency, in line with management expectations. Adjusted operating margins in the period were in line with those delivered in the 2022 full year but significantly up (over 200 bps) over the same period of the prior year. This increases management’s confidence in achieving adjusted operating margin expansion (pre-central costs) in the full year.

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. The division has had a good start to the year with 11% growth at constant currency led by Europe and the US. This has resulted in significant operating margin expansion in the period, when compared to the same period of the prior year, as well as margins slightly above the 2022 full year. Bookings were healthy with the majority relating 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 four months of the year, revenue in constant currency was flat versus the prior year, with similar operating margins to those seen in H2 2022. More encouragingly, the period ended with positive momentum.

Dowlais began independent life with financial leverage of 1.5x 2022 net to EBITDA. So far this year, cash conversion continues to be strong, leaving the group well placed to make further investment in its businesses and attractive shareholder returns.