1. UK Manufacturing Industry Landscape

The UK Manufacturing industry encapsulates companies from several industries such as aircraft, automobiles, chemicals, clothing, computers, consumer electronics, electrical equipment, furniture, heavy machinery, etc. The manufacturing sector processes raw materials into finished goods and produces them in large quantities.

Britain had witnessed a significant slowdown in growth during July 2021 amid facing headwinds such as supply chain disruptions and shortage of staff. Moreover, according to the latest data from the IHS Markit/CIPS, the UK manufacturing PMI had shown a reading of 60.4 during July 2021, while it was 63.9 for the prior month.  The cost of materials also went up amid growth in factory output. Moreover, the supply chain disruptions had put pressure on the cost levels. The elevated cost of everything right from chemicals, commodities, cardboard to metals and foodstuffs has shot up the prices. Recently, the tightening supply of Aluminum in China has pushed its price to hit a 10-year high on 31 August 2021.

According to the recently available data from the Office for National Statistics, the monthly production had witnessed a drop of 0.7% between May 2021 and June 2021. Furthermore, the mining and quarrying sector fell by around 11.9%. However, the manufacturing production witnessed a marginal rise of about 0.2%, with an increase in output for 8 of the 13 manufacturing subsectors. Transport equipment manufacturing demonstrated a rise of approximately 7.40%.

Key Trends in the Manufacturing Sector

Risk Exposures to the Manufacturing Sector

• Environmental Impact: The failure to adopt or apply ethical standards and environmental compliance can contribute to climate change. The manufacturing industry is already one of the most regulated industries, and the regulatory environment is becoming more complex.
• Health & Safety: The sector uses and manufactures hazardous chemicals, and any mishandling, leakage or accident can lead to injury or death at the manufacturing plant. There needs to be a proper supply chain integration, and stringent safety measures need to be put in place to prevent incidents.
• Government Regulations: Changes in regulations in the manufacturing industry can affect the business environment. The regulatory norms drafted by the government keeps on changing, and thus, it is important to work in line with the regulations set by the government.

SWOT Analysis

Benchmark Index Performance

Based on the one-year performance, the FTSE All-Share Industrial Engineering index has outperformed the FTSE 100 and FTSE 250. The FTSE All-Share Industrial Engineering index generated a return of about 67.32%; however, the FTSE 100 generated a return of around 21.45%, and FTSE 250 generated a return of around 36.91%

Figure 1: One Year Benchmark Index Performance

 (Source: Refinitiv; Analysis done by Kalkine Group)

Manufacturing Sector Outlook

According to the leading industry expert, the supply-chain disruptions and raw materials shortage would likely to persist for the medium term. It is expected to exist for the entire 2022. Approximately 72% of the manufacturers have reported of the rising costs and subsequently charging more prices for the products. The manufacturing PMI reached the highest level during May 2021, boosted by the surge in demand after the relaxation of the Covid-19 restrictions. Some firms stated that the clients made forward purchases to shield against supply chain disruptions. Nonetheless, the exports had gathered pace during July 2021 with the reopening of the overseas markets. With reference to the PMI survey during July 2021, the UK manufacturers remained optimistic, and 62% of them forecasted that output would rise for the coming year.

2. Investment analysis and stocks under discussion (WEIR, GDWN, BOY)

After gaining insights into the Manufacturing sector, we would look at the business model of three Manufacturing players listed on the London Stock Exchange.

A. Weir Group PLC (LON: WEIR)

(Recommendation: Buy, Potential Upside: 20.08%, Market Capitalization: GBP 4.38 billion)

Weir Group PLC (LON: WEIR) is an FTSE 100 listed Industrial Engineering Company, which provides solutions for high abrasion mining, infrastructure, and upstream oil & gas applications.

The company declared an interim dividend of GBX 11.5 per share to be paid on 5 November 2021. (Ex-dividend date: 7 October 2021).

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                 

From a technical standpoint, the 20-days exponential moving average of GBX 1,695.81 is indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.08% over the closing price of GBX 1,751.50 (as of 31 August 2021).

B. Goodwin PLC (LON: GDWN)

(Recommendation: Speculative Buy, Potential Upside: 16.36%, Market Capitalization: GBP 231.84 million)

Goodwin PLC (LON: GDWN) is an FTSE All-Share Index listed Industrial Engineering Company. Its areas of operation are divided into two segments, i.e., Mechanical Engineering and Refractory Engineering.

The company declared a final dividend of GBX 102.24 per share to be paid on 8 October 2021. (Ex-dividend date: 16 September 2021).

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.36% over the closing price of GBX 3,085.00 (as on 31 August 2021).

C. Bodycote PLC (LON: BOY)

(Recommendation: Expensive, Potential Downside: 18.57%, Market Capitalization: GBP 1.84 billion)

Bodycote PLC (LON: BOY) is an FTSE 250 listed Industrial Engineering Company, which provides thermal processing services globally. The company, through its enterprise, deliver reliable, cost-effective, and high-quality solutions to its clients.

The company declared an interim dividend of GBX 6.2 per share to be paid on 5 November 2021. (Ex-dividend date: 7 October 2021)

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~66.97) is inching towards an overbought zone and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 18.57% over the closing price of GBX 964.50 (as on 31 August 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 01 September 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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