- Automotive parts supplier hit by slowing EV volumes
- Buybacks no substitute for business growth
- Stock drifts to around 60p, half its Melrose spin-out level
There are a many reasons why global electric vehicles markets are in a slump – still pricey compared to petrol engine versions, reduced, or axed government subsidies for buyers, renewed interest for hybrids, are some of them.
The problem is, the motor industry is vast and supply chains complex, so companies like Dowlais (DWL), a key kit supplier to the industry, have limited levers to pull to seed demand.
‘That’s reflected in a pretty dreadful set of first-half results with a 9% drop in revenue translating into much bigger falls in profit and cash flow’, says AJ Bell investment director Russ Mould. ‘The company has significant fixed costs which cannot be reduced at the same pace as business drops off.’
What it can do is streamline and focus the business, which explains the disposal of its hydrogen operations. Good riddance investors might think given it ran-up losses of £7 million during the half year period. Dowlais is also thinking about a sale or spin-off of its powder metallurgy arm.
But there’s a hidden threat in this strategy, that shedding these parts of the operation cap its ambitions to sit right at the heart of the automotive industry and its EV transition. Dowlais has a stated aim to be ‘powertrain agnostic’ – meaning it can benefit whether demand comes from traditional petrol/diesel vehicles, hybrids or EVs.
‘Achieving this level of flexibility could represent a tall order’, warns AJ Bell’s Mould.
EV GROWTH IS SLOWING
Is there light at the end of the tunnel? That’s debatable data suggests. For example, market researcher EV Volumes cut its European EV unit growth to 2.6% for 2024 in March, from a 3.1% improvement forecast earlier this year. The 15.1 million units this equates to is far short of the 18 million vehicles registered in Europe during 2019.
EV Volumes does not see the European market returning to this level during the current forecast horizon, which runs to 2035. Perhaps those forecasts will prove too bleak, while growth from elsewhere (the US, Far East) could offset declines in Europe, but it’s another unwelcome challenge for Dowlais to overcome.
Dowlais shares have already halved in value since spinning out of Melrose Industries (MRO) in 2023 to roughly 60p. Reversing that trend is going to be tough and share buybacks, like the recently completed £50 million repurchase, are no substitute for business growth.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (James Crux) own shares in AJ Bell.
