This report is an updated version of the report published on 11 May 2022 at 08:48 AM GMT+1.

Castings PLC (LON: CGS)

Castings PLC is an LSE listed United Kingdom-based iron casting and machining company. The Company serves its clients across both domestic and export markets. CGS operates through two key business segments - Foundry operations and Machining. The main subsidiaries include William Lee Limited and CNC Speedwell Limited, among others.

On 15 June 2022, the Company will release H1 FY22 results.

Recent Trend of Dividend Payments

The Company had paid an interim dividend of 3.66 pence per share attributable for H1 FY22 on 06 January 2022, with an ex-dividend date of 25 November 2021. In comparison, the Company had paid an interim dividend of 3.57 pence per share for the prior year. Thus, the year-on-year growth remained around 2.50%.

(Source: LSE, chart created by Kalkine Group)

Growth Prospects

• Share Buyback Programme: CGS has initiated a share buyback programme of up to 100,000 ordinary shares of 10 pence each between the period from 15 March 2022 to 13 May 2022.
• Technological Advancements: CGS had managed to complete the automation of finishing processes within the foundries division and shifted its focus towards the automation of the melting process.
• Encouraging Divisional Performance: The revenue for the Foundry operations division went up by around 69%, and the machining operations sales grew by approximately 32% during H1 FY22 when compared with an equivalent period of the prior year.

Key Risks 

• Pressure on Margins: The unpredictable and sudden changes to the customer schedules had resulted in inefficiencies and put pressure on margins during FY22.
• Semiconductor Shortage: CGS generates around 70% of total revenue from the commercial vehicle sector. However, the supply chain disruption caused by the semiconductors shortage led to a reduction in demand from the commercial vehicle sector.
• Bank of England Warning: The Bank of England had trimmed its economic growth forecast for 2023 and is expected to show a contraction of 0.25% from a previous estimated growth of 1.25%. Moreover, it had also warned of UK inflation reaching around 10% very soon.

Key Fundamental and Shareholders Statistics of Castings PLC. 

Ruffer LLP is the most significant shareholder as it holds nearly 8.75 million shares. 

Financial Highlights (for the six months period ended on 30 September 2021, as on 12 November 2021)

(Source: Company Filings)

• Strong Top-Line Business: The Company’s top-line revenue grew year-on-year by around 67.15% to £69.75 million because of the weak comparable for the prior period.
• Profitability: CGS witnessed a favourable turnaround from reporting a loss of £0.63 million during H1 FY21 to achieving a profit before tax of £5.41 million during H1 FY22.
• Balance Sheet: CGS maintains a strong balance sheet with cash levels of £34.6 million as of 30 September 2021.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 10 May 2022, CGS shares were closed at GBX 316.00, the same as the previous day closing price. Stock 52-week High and Low were GBX 420.00 and GBX 282.52, respectively.

On a daily chart, the stock price is sustained between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Also, the 14-days RSI stood at ~48.55.

Valuation Methodology: Price/Earnings Approach (FY23E) (Illustrative) 

Business Outlook

CGS has shown a solid business performance during the first half of FY22 with a strong top-line business growth and a positive turnaround into profitability. Moreover, the Company had demonstrated an increase in the total weight of castings despatched and associated revenues for FY22 The Company would enhance investments in its Foundry operations driven by a strong group cash position. Meanwhile, CGS aims to make accelerated progress on the production line automation upgrade to be completed in 2022/23. In a nutshell, the Company remained well placed to satisfy the increased demand and anticipated FY22 results to remain slightly ahead of market expectations.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the strong H1 FY22 results, technological advancements, consistent dividend payments, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Castings PLC at the closing market price of GBX 316.00 (as of 10 May 2022), with lower-double digit upside potential based on 13.00x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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