Standing by Castings

A long and winding road

Last October, I added Castings (CGS) to the Thrifty 30 portfolio when its market, iron castings and components for vehicles, had collapsed.

Sales were down 15% and profitability (return on total assets) had fallen sharply. Casting’s manufacturing sites were operating at 50% of their capacity, it had laid off 350 employees, delayed opening a new foundry, was selling unused electricity contracts for less than it had paid for them, and expected to lose £2.2m because its Icelandic bankers had gone into administration.

Since then its share price has drifted sideways from 195p to 182.5p. It’s paid £13.95 in dividends, and will pay another £37.54 in August. Overall the portfolio has broken even in its first six months of ownership, which is of course, far to early to judge a value investment.

Today, though, the situation looks slightly rosier. Although the year’s sales fell again, 28% from £85m to £61m, profitability is rising (green line) and the company is operating at 80% of capacity. The new foundry is open three days a week, and Castings is taking back some of the workers it laid off. It’s maintained the dividend and received money from the administrators of its Icelandic banks, although the amount it expects to lose remains unchanged.

The cost of laying off skilled workers and re-employing them, and financing assets like foundries when they are unproductive, is a reminder of why industrial companies that suffer reduced demand in recessions generally trade at lower valuations.

Despite all the problems last year, I felt Castings was a role model for British engineering. It had a £16m cash buffer against the recession, had not cut it’s dividend since 1992 when my data began, and had invested heavily in modernising its manufacturing sites. It’s chairman had been with the company since 1960 and had a reassuringly large interest in its long-term success, owning 4.5% of the company. All five of Castings’ executive directors had been with the company two decades or more.

Not much has changed. Chris Roby, financial director, is retiring and his replacement Steve Mant comes from the company’s auditor. I’m a bit leery of this development as cosy relations between companies and their auditors have occasionally led auditors to fail in their duty to scrutinise the accounts properly.

As with distributor Autologic, and engineer Ricardo, the portfolio’s other companies serving the car and commercial vehicles markets, the road back to former levels of profitability is likely to be long and winding, especially now the government’s scrappage scheme, which subsidised new car sales, is over and a muted recovery or a lapse back into recession seems likely. About half Castings’ revenues come from exports to European manufacturers, where prospects for recovery may be even grimmer.

But Castings seems to be demonstrating that it can profit in difficult circumstances and I stand by my conclusion last October. At ten times average earnings over the last ten years, and 1.1 times book value the shares look cheap. Castings’ F_Score is 6, and its long history of profitability (green chart) and financial strength (yellow chart) are reassuringly consistent.

The market has yet to catch on, but senior non-executive director Gerard Wainwright bought 10,000 shares last January at 174p. I think he got a good deal.

If the portfolio didn’t already have Castings in it, I’d be adding it now.

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