Full-year results from the Human Screen

Although it manufactures castings used to machine auto parts, a notoriously cyclical industry, Castings has a core of steel.

Highlights

• Adjusted operating profit up 48%
• Adjusted return on tangible assets: 14%
• Adjusted net profit of ''17m compared to net cash flow of ''21.5m (''9m after net capital expenditure)
• Net cash up 30% at ''18m
• Per-share dividend up 9%

The Human Screen comments:

It’s no secret the Human Screen likes Castings, he’s held it in the Thrifty 30 portfolio for two and a half years and hopes to include it for many more. It manufactures iron castings that are subsequently machined into parts like differentials often for prestigious German and Swedish car and truck manufacturers. British companies aren’t supposed to be good at this sort of thing, but here Castings is.

And unlike many long-established businesses its pension scheme is in surplus and it owns its own foundries, so no off-balance sheet lease obligations. Unlike the stereotypical British manufacturing company it has decades of unbroken profitability behind it (a record it narrowly maintained in 2009 when, let’s face it, the auto industry was in complete disarray) and no debt.

Although 2009 showed profits are cyclical, it’s record has convinced the Human Screen to think of Castings more like a stalwart. Efficient operations and financial strength, carry it through the troughs.

On an unlevered post-tax earnings yield of 13% Castings looks cheap, but the Human Screen is cautious about that statistic as 2012 was a record year for the company and it may not be able to sustain that level of earnings given the industry it’s in. Averaging approximate earnings over the last six years gives a more conservative yield of 8%. The Human Screen thinks the truth, as in the best guess at a conservative earnings yield, is somewhere in between!

However, Castings has been investing heavily in its foundries (which is depressing free cash flow) so investors can hope for the fruits of that investment in the coming years.

Talking of yields, Castings also looks like a nifty income stock. Although it froze the dividend for three years during the financial crisis it has not cut it since Sharescope time began in 1994 and the dividend yield is 3.5%.

More on Castings

LON:CGS

HS++ (currently considering adding more shares to the Thrifty 30)