Investing.com -- Shares of Dowlais Group (LON:DWL) dropped on Tuesday after the company reported disappointing 1H24 earnings and reduced its full-year outlook, signaling mid-to-upper single-digit downside risk to consensus estimates, as per analysts at RBC (TSX:RY) Capital Markets.
“H1 was below our forecasts and the FY outlook reflects further reductions in industry forecasts and continued BEV related pressures such that the consensus downside risk is potentially mid-upper single digit based on revised guidance,” said analysts at RBC Capital markets in a note.
Dowlais Group reported 1H24 sales of £2,571 million, falling short of RBC Capital Markets' estimate of £2,640 million. The company’s constant currency revenues declined by 5.1% year-over-year, compared to RBC's expectation of a 3% decline.
This compares to Jefferies and consensus estimates of £2,566 million and £2,696 million, respectively. The company's EBITA margin stood at 5.9%, in line with Jefferies' estimates but 30 basis points lower year-over-year
Earnings per share (EPS) were reported at 4.9p, missing the RBC estimate of 6.0p. The group's net debt to EBITDA ratio increased to 1.6x, up from 1.4x at the end of 2023.
The primary underperformance stemmed from the Automotive division, particularly the ePowertrain segment, which saw revenues decline by 20% amidst continued BEV-related pressures.
Despite global light vehicle production falling by 2.4% (excluding China), Dowlais’ Automotive revenues decreased by 6.3%, with core Driveline business declining by 1.4%. On the other hand, the Chinese market showed resilience, growing by 6.6% due to increased OEM share.
In contrast, the Powder Metallurgy (PM) division slightly outperformed market expectations with constant currency growth of 0.2% and a 50 basis point improvement in margins year-over-year. However, given the broader industry challenges, the overall impact on the group’s performance was negative.
Dowlais Group recently sold its Hydrogen business for a nominal fee, which RBC Capital Markets views as a positive move, as it removes an ongoing profit and loss (P&L) and cash flow headwind (which amounted to a loss of £15 million in 2023).
Additionally, Dowlais Group has revised its FY24 outlook downward, aligning with industry forecasts that now predict a 3.6% decline in H2 sales and a full-year decline in light vehicle sales of 2%.
“We estimate the new FY24F guidance is c £320-325m vs our current estimate of £340m (the underlying downgrade is also slightly higher when we consider the Hydrogen disposal),” said analysts at Jefferies.
The company expects mid-to-high single-digit declines in FY24 adjusted sales, with operating margins projected between 6% and 7%.
RBC Capital Markets also highlights several risks, including the possibility of continued BEV-related challenges, failure to improve profitability in the Powder Metallurgy division, and potential difficulties in securing new orders. Additionally, the market's overall unsupportive conditions in 2024 could further strain Dowlais’ performance.
Jefferies flags failure to secure new bookings, lack of improvement in Powder Metallurgy, difficulties in free cash flow generation, loss of pricing power, and slow progress in margin recovery as key risks to the company. Additionally, foreign exchange (FX) fluctuations could further impact the group's financial results.