Castings plc (LON:CGS) FY22 results show a marked recovery on the pandemic impacted FY21 numbers with volumes broadly in line with pre-Covid levels, albeit c.5% below FY19 peak. Revenue increased 29.5% to £148.6m (FY21: £114.7m) with adj operating profit of £12.0m (FY21: £4.3m), a 180% increase yoy as the margin more than doubled to 8.1% (FY21: 3.7%) benefitting from the recovery in volume and with prices increasing 4.7%. Despite the strong recovery in FY22, several important KPIs remain below pre-pandemic levels with operating margin standing out at 8.1%, 25% below (200bps) the FY19 level of 10.1%. Margin and revenue in line with FY19 would see operating profit increase c.25% from the level reported in FY22. The positive medium-term outlook should see the margin move back towards double digit, driving material profit growth (c. 48%) over the forecast period.Operationally the business has handled well the supply chain issues that closed OEM manufacturing facilities and led to volatile demand patterns.
The final dividend of 12.6p results in FY22 dividend of 16.2p (FY21: 15.3p) a 6.4% increase. In addition, a special dividend of 15.0p for the year has been declared, the first time since FY19. This is in line with Castings strategy of making returns to shareholders should the net cash position exceed £25.0m. Zeus estimates do not include further special returns despite the balance sheet remaining net cash and the business being cash generative.
Castings is cheap relative to peers and on an absolute basis, trading on just 10x FY23 forecasts with a c.6% yield. Zeus estimates a fair value of 433p, using various valuation techniques, equating to 49% upside.
Outlook underpinned by new platforms
¨ Strong FY22 performance: Revenue increased 29.5% £148.6m (£114.7m), but as importantly is broadly back to pre-covid levels. Volumes remain marginally below the 52k tonne FY19 level, c.5%, but average selling price per tonne is up 6.7% to £2,924, leaving revenue down just 1.7% on FY19.
¨ New platform wins underpin the outlook across the forecast period: Castings has worked hard to increase the amount it sells into the leading OEMs. This will pay off over the next few years as new OEM platforms come on stream containing additional, higher margin product. Volvo estimates that European HGV registrations in 2022, whilst materially ahead of FY21, will remain c.10% below FY19.
¨ Margin recovery will drive material profit growth: FY22 operating margin remains 200bps below the 10.1% achieved in FY19 despite volumes and pricing recovering. Costs have played a part with raw material and labour increasing, but inefficiencies resulting from OEM plant closures and volatile demand due to supply issues have had a material impact. Normalisation in the supply chain should see margins improve.
¨ Further special dividends likely: Castings has returned cash to shareholders by way of special dividend in FY16, FY19 and, as announced today, FY22. It looks to make additional returns when net cash is above £25.0m, Zeus estimates assume it will remain above this level in FY23 despite the additional payment for FY22.
¨ Valuation: 10x FY23 earnings is good value for a market leading business and is trading at a discount to all major peers. Zeus estimates fair value of 433p for the shares, offering material upside of 49% on last night’s closing price of 290p.
|Shares in issue||43.6m|
|12m Trading Range||288p–420p|
|Next Event||AGM 16th August|
|Yr end Dec (£’m)||2022A||2023E||2024E||2025E|
|yoy growth (%)||29.5||13.7||4.5||4.6|
|EPS (p) basic adj.||19.6||28.2||29||30.7|
|EPS (p) ful dil adj.||19.6||28.2||29||30.7|
|EV / EBITDA||4.4||3.6||3.1||2.7|
|Div yield (%)||10.8||5.8||6||6.3|
|WC commitment / Sales (%)||25.1||21.4||20.9||20.9|
Source: Audited Accounts and Zeus estimates
^ DPS includes special dividends declared in FY22 of 15p each