Castings CGS

First half results announced last month by Castings (CGS), the West Midlands based foundry and machining group revealed a robust earnings performance. The group is now reaping the benefits of prior investments in state of the art production facilities. Operating margins have increased a full one percent to 13.4 percent over last year, despite the challenges presented by higher energy and raw material costs. We believe that the ongoing investment in modern plant and equipment combined with world class technical expertise will spur further market share and earnings gains in the second half of the year.

In the six months to September 30, turnover rose by 15.5 percent to £36.4 million. Increased volumes and the recovery of higher input costs from customers drove sales higher. The end of fixed price contracts, particularly at subsidiary William Lee, underpinned earnings gains. As a result pre-tax profits raced ahead 42.5 percent to £5.4 million.

Castings continues to be an excellent cash generator with net cash flow from operations rising 22 percent to £5.3 million. The balance sheet is solid with over £25 million in cash and no debt, although a £6.5 million pension deficit exists. Short-term solvency is evidenced by the group's healthy current ratio (current assets divided by current liabilities) of 3.6 times.

We are encouraged that following the completion of fixed price contracts, Castings has been successful in passing on higher costs to customers while also increasing volumes. We are confident that the company has the financial strength to continue investing in state-of-the-art facilities, or even a bolt on acquisition to improve capabilities and support profitability. In our opinion the shares are trading at undemanding levels, with a prospective price earnings multiple under 14 times, and a yield around 4 percent.