The automotive industry has been grappling with a myriad of challenges, and Dowlais, the car parts maker spun off by Melrose Industries in April last year, has not been immune to these headwinds. Since its inception, the company’s share price has taken a nosedive, plummeting from 117p to a dismal 58¾p, marking a fresh low following the release of its half-year figures.
Dowlais, once a part of the aerospace-to-autos conglomerate GKN, was acquired by Melrose in 2018 for a staggering £8 billion. At the time, Melrose valued the automotive wing at £3.5 billion, setting an ambitious target of achieving margins exceeding 10 percent. However, the current market capitalisation of Dowlais stands at a mere £810 million, with adjusted auto margins languishing at 6 percent.
Liam Butterworth, the chief executive of Dowlais, remains optimistic despite the challenges. He asserts that the company has undergone significant retooling since 2018, transforming it into a “fantastic, high-quality” business that now holds the title of the world leader in drive systems. Butterworth attributes the company’s struggles to a series of “headwinds,” ranging from the COVID-19 pandemic to the volatility surrounding the industry’s transition to electric vehicles.
The market’s sentiment towards Dowlais has been less than favourable, with S&P projecting a 2 percent decline in new light vehicle production this year, coupled with a “material slowdown” in the electric car segment. Butterworth laments the “chaos” within the industry, citing fluctuating regulations, tariffs, and subsidies, as well as abrupt changes in manufacturers’ plans.
Dowlais has also faced short-term hits to its free cash flow due to capital expenditure investments in new factories in Mexico and Hungary, as part of its strategy to shift operations from higher-cost locations in the US and Germany. While these moves are expected to yield benefits in the long run, the immediate impact has been less than favourable.
As investors grow increasingly impatient, Butterworth is under pressure to find a swift solution to reverse the company’s downward trajectory. One potential avenue is the sale of the powder metallurgy arm, valued by Investec at £870 million. Although this figure falls short of Melrose’s initial £2 billion target, it still surpasses Dowlais’ current market capitalisation.
The automotive industry’s volatility and the market’s reluctance to wait for a turnaround have left Dowlais in a precarious position. The onus now lies on Butterworth and his team to navigate these turbulent waters and steer the company towards a brighter future. Failure to do so could have dire consequences for this once-promising player in the automotive sector.
Post Disclaimer
The following content has been published by Stockmark.IT. All information utilised in the creation of this communication has been gathered from publicly available sources that we consider reliable. Nevertheless, we cannot guarantee the accuracy or completeness of this communication.
This communication is intended solely for informational purposes and should not be construed as an offer, recommendation, solicitation, inducement, or invitation by or on behalf of the Company or any affiliates to engage in any investment activities. The opinions and views expressed by the authors are their own and do not necessarily reflect those of the Company, its affiliates, or any other third party.
The services and products mentioned in this communication may not be suitable for all recipients, by continuing to read this website and its content you agree to the terms of this disclaimer.