- Heavy truck demand weakened further in Q3
- Surging power costs a headwind
- But Castings could be over the worst
Castings’ (CGS) shares came under heavy selling pressure after the iron casting-to-machining firm focused on the European heavy truck market warned full-year profits will be ‘substantially below’ market expectations.
The Walsall-headquartered group pinned the blame on plunging demand for heavy trucks, soaring electricity costs as well as the losses associated with its new larger casting business in Scunthorpe.
In early dealings on 18 February, the stock cratered 20% to a five-year low, before clawing back losses by mid-morning to leave the shares down 12% at 254p.
UNDER PRESSURE
For the uninitiated, Castings is an iron foundry operator that produces parts on a just in time basis for the commercial vehicle sector.
Its competitive strengths include long-term ties to the major original equipment manufacturers (OEMs) in its core European heavy truck market, while the firm also supplies the wind power, agriculture, rail and material handling markets.
Having massaged earnings guidance lower in August 2024, Castings was in the doghouse with investors again after warning taxable profits for the year ending 31 March 2025 are now expected to fall well short of estimates.
Broker Canaccord Genuity lowered its adjusted pre-tax profit forecast by 45% to £5.5 million on the disappointing news and downgraded its price target from 340p to 325p.
Castings called out a further drop in demand for heavy trucks, which speak for roughly three quarters of group revenue, in the third quarter.
This will have a deleterious impact on the profitability of its foundry and machining businesses, warned Castings, although volumes are ‘recovering somewhat’ during the final quarter.
UNHELPFUL SURGE
Management also blamed the earnings downgrade on rising electricity costs due to penalties payable for unused forward-purchased power, a direct impact of lower volumes, as well as the start-up costs and trading losses associated with the new business in Scunthorpe.
On the positive side of the ledger, the engineer assured investors these increased power costs are not expected to impact profitability during the year to March 2026.
Furthermore, the new Scunthorpe business should swing into the black in the remaining months of the current year and into the next financial year.
The hard-pressed firm and recovery candidate also stressed that its major customers have recently reported ‘increasing sales orders which are expected to positively impact Castings sales volumes early in the next financial year’, whilst highlighting the ongoing strength of its balance sheet.
