Castings: Annual Results Are Worst Since 2011 As Management Talks Of ‘Robotic Handling’

14 June 2017
By Maynard Paton

Quick update on Castings (CGS).

Event: Annual results for the twelve months to 31 March 2017 published 14 June 2017

Summary: A lack of work at CGS’s smaller machining division meant these annual figures were the engineer’s worst since 2011. Thankfully there were no worrying omens for 2018 — the group’s order book apparently remains “steady” while the second-half performance even showed some promise. The hefty cash pile and a resilient dividend continue to be shareholder centrepieces, and talk of “robotic handling” suggests margin improvements may be on the way.  My P/E of 13 does not indicate a bargain and I continue to hold.

Price: 450p
Shares in issue: 43,632,068
Market capitalisation: £196m
Click here for all my previous CGS posts

Results:

My thoughts:

* These results were not as bad as they could have been 

A profit warning this time last year had already signalled these 2017 figures would not be spectacular.

The final numbers showed revenue down 10% and operating profit down 19%. The shortfall was due mostly to the completion of a major contract — without any replacement work lined up — within the group’s smaller machining division.

The table below contrasts the 2017 performance with the achievements of prior years:

Year to 31 March20132014201520162017
Revenue (£k)122,215137,466131,268132,448118,822
Operating profit (£k)18,70221,28617,38619,17515,548
Other items (£k)14936324315130
Finance income (£k)306184137186237
Pre-tax profit (£k)19,15721,83317,54719,67615,915
Earnings per share (p)33.939.631.837.129.8
Dividend per share (p)12.313.013.313.714.0
Special dividend per share (p)---30.0-

Although today’s statement confirmed the worst annual result since 2011, the second-half performance did appear a tad better than November’s first-half statement.

In particular, the group’s half-year split showed the main foundry division scoring a higher H2 profit (£8,294k) than that reported for 2016 (£7,767k):

H1 2016H2 2016FY 2016H1 2017H2 2017FY 2017
Group
Revenue (£k)64,96267,486132,44857,86360,959118,822
Operating profit (£k)9,4689,70719,1757,0108,53815,548
Foundry
Revenue (£k) 55,10259,636114,73854,18757,651111,838
Operating profit (£k)6,9157,76714,6826,2128,29414,406
Machining
Revenue (£k)9,8607,8504,6963,6763,3086,984
Operating profit (£k)2,5532,1464,6997987211,519

Another highlight within the foundry division was yet another improvement to the revenue earned per tonne of castings produced:

Year to 31 March2011201220132014201520162017
Foundry revenue (£k)97,163117,036106,674119,893113,300114,738111,838
Dispatched weight of castings (tonnes)50,60057,20052,70057,60052,70052,00047,200
Revenue per tonne of castings (£)1,9202,0462,0242,0812,1502,2072,369

The ongoing shift towards “more complex, machined parts”, alongside various productivity investments, appeared to shore up the performance.

The management narrative also referred to “investment in robotic handling” and  “the role of automation”, which suggests extra employees may not be needed to handle additional future revenue.

Between 2006 and 2016, the percentage of revenue paid to staff has reduced from 37% to 32% and I’d like to think that “robotic handling” can help that proportion decline further.

If future productivity improvements can be made, then I trust CGS’s group margin may be able to increase as well. The 13.1% margin reported for 2017 was the lowest since 2009:

Year to 31 March20132014201520162017
Operating margin (%)15.315.513.214.513.1

* Cash flow, balance sheet and return on equity

I am not too worried about CGS’s accounts.

Cash conversion appeared reasonable, with the somewhat large £14m capital-expenditure sum including £5m spent on building an extension to create extra warehousing and manufacturing space:

Year to 31 March20132014201520162017
Operating profit (£k)18,70221,28617,38619,17515,548
Depreciation (£k)7,4166,0466,7606,8537,276
Net capital expenditure (£k)(6,846)(9,659)(8,138)(7,167)(14,191)
Working-capital movement (£k)(3,644)(16)(4,095)1,216(1,634)
Net cash (£k)23,65427,78030,02140,38527,228

(I suppose spending £5m on a new factory extension shows at least CGS’s directors are confident of better times returning!)

The year-end cash pile was left £13m lighter at £27m (62p per share) following the payment of the £13m/30p per share special dividend announced twelve months ago. CGS continues to carry no debt.

Meanwhile, CGS’s defined-benefit pension scheme remains in surplus — up £2.1m to £16.8m — and, perhaps uniquely for a quoted company, continues to dribble surplus cash back to the group!

Not surprisingly, the lower earnings have translated into a reduced return on average equity calculation:

Year to 31 March20132014201520162017
Return on average equity* (%)19.321.416.118.113.9

(*adjusted for net cash)

I am hopeful this ratio can one day return to the more appealing levels of the past.

Valuation

With today’s statement claiming that “customer requirements [are] forecast to remain steady at the current levels”, I think it is fair to assume earnings for 2018 may be quite similar to those of 2017.

Taking the reported 2017 operating profit of £15.5m and deducting 19% standard UK tax, I arrive at earnings of £12.6m or 28.9p per share.

Then subtracting the aforementioned 62p per share net cash position from the 450p share price, my estimate of CGS’s enterprise value comes to 388p per share or £169m.

Dividing that 388p per share by my 28.9p per share EPS guess gives a multiple of about 13. Given the immediate “steady” outlook, the present rating does not strike me as an obvious bargain.

Meanwhile, the ordinary annual dividend was upped a very modest 2% to 13.97p per share and currently supports a 3.2% income.

The annual payout has now been lifted on 24 occasions during the last 26 years, during which time it has never suffered a cut.

Maynard Paton

Disclosure: Maynard owns shares in Castings.

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