Dowlais Group PLC (LSE:DWL, Financial), is a British company operating in the Automobiles and Parts sector, is a constituent of the FTSE 250 index and has a market capitalization of $2.1 billion. In April 2023, the company made its debut on the London Stock Exchange, following a demerger from the renowned FTSE 100 British turnaround specialist, Melrose Industries PLC (LSE:MRO, Financial). The separation has now positioned Dowlais Group PLC (LSE:DWL) as an independent business, enabling it to harness the advantages of enhanced flexibility in pursuing its growth strategy, supported by its own balance sheet and independent access to capital.
Core Businesses and Strategic Goals
At the core of Dowlais Group PLC (LSE:DWL, Financial)'s operations are two principal businesses, GKN Automotive and GKN Powder Metallurgy, both of which hold esteemed market-leading positions and have extensive global footprints to cater to their diversified customer bases. The goal of the demerger was to unite these businesses under a refocused Dowlais Group PLC (LSE:DWL) to capture the substantial opportunities available in the rapidly changing automotive parts sector, given their shared qualities such as leading market positions and cutting-edge technical expertise.
This amalgamation of a propulsion-agnostic core with new electrification capabilities positions the group to thrive in the ever-evolving automotive landscape. Additionally, the nascent and newly commercialized GKN Hydrogen business is an early-stage growth business which complements the established businesses, automotive and powder metallurgy units, by capitalizing on the global shift towards renewable energies and the increasing demand for advanced and secure storage technologies.
Investments and Restructuring
Following Melrose Industries PLC (LSE:MRO, Financial)'s acquisition of GKN plc in 2018, both GKN Automotive and GKN Powder Metallurgy underwent strategic restructuring and received substantial investments aimed at promoting growth and efficiency. These investments primarily focused on improving commercial and operational efficiency, along with significant investments in research and development. Consequently, both businesses are now strategically positioned to leverage the growing trend of hybrid and electric vehicles in the automotive industry.
During its time under Melrose Industries PLC (LSE:MRO, Financial) ownership GKN Automotive booked effective revenue of over £20 billion, with a book to bill ratio well over 100% each year, with terms consistent with stated operating margin targets. The business’s industrial strategy has been redefined, with a focus on end-to-end manufacturing in single plants to better leverage their prized vertical integration and a streamlining of their operational footprint through the closure or sale of 12 plants across both GKN Automotive and GKN Powder Metallurgy businesses.
Source: London Stock Exchange Admission prospectus
GKN Hydrogen and Renewable Energy
GKN Hydrogen which emerged from GKN Powder Metallurgy, has a dedicated focus on developing and commercializing proprietary metal hydride technology, which facilitates safe, compact, and environmentally friendly hydrogen storage. The applications of this innovative technology extend across various industrial and commercial sectors, marking it as a crucial growth component of the Group's portfolio.
The expansion of both renewable hydrogen and other renewable energy production being pursued by governments worldwide necessitates a corresponding expansion in energy storage. As an example, the European Commission’s REPowerEU plan’s ambition is to produce 10 million tonnes of renewable hydrogen from 40 gigawatts of electrolysers and to import 10 million tonnes of renewable hydrogen into the EU by 2030, with scaling the development of hydrogen infrastructure identified as an area of focus.
Structural Growth in Core Businesses
GKN Automotive, being closely integrated with automotive original equipment manufacturers worldwide, enjoys strong collaborations with 90% of automotive global OEMs. This collaboration encompasses traditional OEMs and emerging ones with a specific focus on electric vehicles. As a direct supplier of parts to OEMs for the vast majority of its production output, GKN Automotive is considered a Tier 1 supplier.
The listing prospectus published in March 2023 highlighted the advantageous position of GKN Automotive and GKN Powder Metallurgy to benefit from the industry-wide shift towards electrification. The increasing demand for electric vehicles presents a fertile ground for both businesses, as they experience incremental growth in their existing core products and venture into new EV solutions.
Advantages and Operational Excellence
GKN Automotive, with its core driveline products, including sideshafts, has a significant advantage. These products are powertrain-agnostic, meaning they are equally vital for electrified vehicles as they are for internal combustion engine vehicles. The market leadership of GKN Automotive in sideshafts and its investments in eDrive engineering solidify its prominent position in the market for both powertrain-agnostic and xEV (electric vehicle) products.
Operational excellence further bolsters GKN Automotive's standing. Its virtual design and remote testing capabilities enable reduced development lead times and flexible delivery of components and systems. Additionally, GKN Automotive stands out by being able to supply the automotive industry across every stage of the electric vehicle transition.
The company's impressive track record of innovation spans several decades, culminating in its dominance in sideshaft, propshaft, and AWD (All-Wheel Drive) systems. Furthermore, GKN Automotive continues to make significant investments in eDrive engineering, setting new standards in precision and quality control for electric vehicle component testing.
Strategic Vision and Risks
Dowlais Group PLC (LSE:DWL, Financial)'s strategic vision revolves around three key pillars: leading in their two market-leading businesses by delivering industry-leading financial performance, transforming their businesses through technology innovation to enable electrification and green energy, and accelerating sustainable organic growth and disciplined mergers and acquisitions. The company's steadfast commitment to this strategy is expected to solidify its position as a leading player in the global engineering sector and create long-term value for its shareholders.
Despite its promising outlook, Dowlais Group PLC (LSE:DWL, Financial) faces certain risks. The company's revenues are subject to significant fluctuations based on global light vehicle demand and production levels, factors beyond its control. Additionally, addressing material discrepancies that may arise between the technologies it develops and market demand presents a challenge that could affect market share and result in increased operating costs.
Valuation and Future Prospects
Notwithstanding these challenges, Dowlais Group PLC (LSE:DWL, Financial)'s valuation appears attractive, with a forward price-to-earnings (PE) ratio of 8.6x and an enterprise value-to-forward-EBITDA ratio of 4.2x according to GuruFocus data. Moreover, the decent Piotroski F-Score of 7 out of 9 signifies the stock's underlying investment value potential.
I will be eagerly awaiting the Group's interim results, scheduled to be announced on 12 September 2023. As Dowlais Group PLC (LSE:DWL, Financial) sets its sights on a future shaped by innovation, technology, and sustainable growth, and its journey as an independent entity moves forward, Gurufocus readers should watch this stock with anticipation.
