Castings PLC (LSE:CGS, Financial), a leading iron casting and machining group based in the United Kingdom, has demonstrated impressive growth in both revenue and profits, with a positive outlook for the future.
Established in 1835, the company has evolved from a foundry business in England’s West Midlands to its current form, driven by organic expansion and two strategic acquisitions. It is divided into three operational segments: the original Castings business at the Midlands-based Brownhills foundry, the acquired machining business on the same site and the largest foundry, William Lee, situated in Dronfield in the Peak District. This setup allows Castings to excel in melting, molding and finishing iron castings.
Financial performance
The company, listed on the London Stock Exchange’s Main Market Premium segment, released its full-year results on June 15.
Castings' fiscal year ended March 31 showcased impressive growth, setting historical records. The company dispatched 53,000 tonnes of products, a notable 6.6% increase, driving a 35% revenue surge to approximately $255 million. Removing the impact of energy surcharges, the underlying revenue growth was 24%. Operating profits also climbed by 36% to reach approximately $20.8 million, concluding the year with net cash of approximately $45.1 million.
Dividend growth
Demonstrating confidence, Castings declared a 0.17 pounds (22 cents) total dividend, marking a 6.9% increase, alongside a special dividend of 0.15 pounds. Impressively, the company has sustained or augmented dividends for 42 consecutive years. The company has a market capitalization of approximately $229 million.
Castings effectively navigated escalating energy, labor and other costs by transferring these to customers. Although energy cost hikes totalling approximately $38.1 million were absorbed, they impacted the overall margin. Notably, the machine shop rebounded to profitability, with projected margin improvement in the current year. Resolving early-year production issues, Castings capitalized on strong demand from the U.S. and non-truck sectors, including wind energy, truck and trailer breaking and coupling.
Track record and future projections
Analyzing its five-year financial performance, Castings showcased robust recovery post-Covid, as evidenced by surging metrics.
Revenue soared 35% to approximately $255 million, largely propelled by 10% volume mix increase and remaining gains attributed to price adjustments. The operating profit experienced a 36% surge, maintaining a margin of 8.1%. Excluding energy surcharges, the margin rebounded to 8.8%, inching toward the aspirational 10.1% of 2019. Return on capital employed peaked at 17%, a multiyear high. A strong financial stance manifested in approximately $17.5 million free cash generated, culminating in a year-end net cash position of approximately $45 million. Given this positive trajectory, I can see a path to pre-tax profits of about $25 million and year-end net cash of $50 million for the coming year.
Foundry sector and machining division performance
The foundry sector posted impressive results, with revenue climbing 37% to approximately $252.7 million, fuelled by the booming heavy truck industry. The average selling price per tonne surged by 28.1%, yielding 24.4% profit growth, which amounted to approximately $20.7 million. Though a slight margin dip to 7.3% occurred due to energy surcharges, the margin, minus these surcharges, mirrored the previous year's 8.10%.
Turning to the machining division, revenue surged 7%, sustained by a robust fourth quarter, sustaining momentum into the current year. The division achieved profitability after a six-year hiatus, though the overall margin remained modest at 0.6%. Encouragingly, a substantial 7% margin marked the fourth quarter, propelling management's confidence in higher future profits. While marginally lower cash generation ensued from heightened working capital, approximately $1.4 million in capital expenditures were incurred, with future capital expenditures ranging from $1 million to $2 million.
Robotic automation and AI
Castings has been experiencing robust customer demand, particularly in new engine platforms and the U.S. market. The company has invested in robotic automation and is testing artificial intelligence-based inspection systems.
Despite grappling with substantial cost hikes, Castings successfully shifted these increases to customers, supplemented by government support due to high energy usage. The company has increased wages to ensure it is an attractive employer in the current environment, quelling previous recruitment struggles. A modest energy cost reduction is anticipated for the ongoing year.
Sustainability and M&A opportunities
With an eye on sustainability, Castings employs scrap metal in recycling efforts, with a focus on electric melting. Improvements, such as central refrigeration and increased in-house machining, aim to reduce product travel distances. A sand reclamation project, which would curb landfill waste, is currently being evaluated.
In terms of mergers and acquisitions, management has discussed potential opportunities in aluminium, but there have been no specific transactions yet.
Risks and valuation
The biggest risk I can see is that battery electric vehicles might eat into some of the demand for Castings' current product set. However, management is aware of this emerging threat and is looking for new opportunities for supplying products to this future market. In the meantime, operating at full capacity, a proposed 20% capacity increase is under consideration.
With a GF Score of 86 out of 100 and a GF Value rating of modestly undervalued, the stock should be interesting to those investors seeking value.
More specifically, the enterprise value-to-Ebitda ratio of 5.70 and enterprise value-to-forward Ebitda of 5.60 look cheap. The company's Piotroski F-Score of 7 out of 9 and high Altman Z-Score of 5.5 also demonstrate good financial strength.
Summary
In summary, Castings anticipates robust activity continuing through at least 2023, possibly extending into 2024. Customer forecasts support growth in 2024, though management exercises caution. The inclusion of Scania engines in MAN vehicles for 2024 signifies visible growth. Automation investments, ongoing cost transfers and capacity expansion are key positives.
As an investment proposition, Castings offers a strong financial position, modern facilities for the truck industry and growth prospects internationally. Management's optimism seems justified in my opinion and for investors looking for small and mid-cap opportunities in the Industrials sector, this stock is one to watch.
