Yet Another Value Podcast - Value Situations' Conor Maguire on why strategic review at Dowlais $DWL.L indicates a live catalyst

Episode Date: September 17, 2024

Conor Maguire, Founder and Editor of the Value Situations Newsletter, joins the podcast for his third appearance to share his thesis on Dowlais Group Plc (DWL), a portfolio of market leading, high-technology engineering businesses that advance the world's transition to sustainable vehicles. For more information about Conor Maguire and Value Situations Substack: https://valuesits.substack.com/ DWL write up on Value Situations Newsletter: https://valuesits.substack.com/p/dowlais-spinning-wheels Chapters: [0:00] Introduction + Episode sponsor: Tegus [2:15] What is Dowlais Group Plc (DWL) and why are they interesting to Conor [9:18] What is Conor seeing about Dowlais that the market is missing [16:42] Dowlais recent history [21:45] Trends in the auto industry [27:43] Bidding war time from 2018 [32:29] Margin expansion [38:03] Management and incentive structure [49:08] Capital allocation scenarios [53:25] Who's the buyer of Powdermet [58:50] Cyclicality of Powdermet business? [1:02:16] Final thoughts on Dowlais / one more question about goodwill on the balance sheet Episode sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

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That's Tegus.com slash value. Trust me, once you've experienced Tegis, you won't go back to your old way of doing research. All right, hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have on. I think it's for the third time, my friend and the author of Value Situations Newsletter,

Connor, how's it going? I'm good, Andrew. Thanks for having me on again and good to speak with you. Look, anytime I can get a great Irish accent on the podcast, you've got to go for it. But we're going to talk about one stock in particular. We might bounce a few others as we go. But before we get started, just a disclaimer to Ryan to everyone, nothing on this podcast is investing advice.

That's always true. by domestic listeners, maybe particularly true today. We're mainly going to talk about international, particularly European stocks. So remember, that comes with maybe a little bit of extra, a little bit of heightened risk, maybe some tax consequences, everything, not tax advisors, not financial advisors, consultant advisor, do your own work, all that sort of stuff. Connor, the company we want to talk about today, you correct me, I thought it was Dallas. It is Dalai.

The ticker there is DWL. It trades in London. This is, I know it's been a event investors favorite, It's been many of an investor's favorite stock for two-ish years, but I'll just toss it over to you. What is Dallay and why are they so interesting right now? Yeah, no, thanks, Andrew. Yeah, actually, I had to laugh when you put out the post about our discussion on Twitter or X the other day. And there was no comments on the back of it, I think, from the last time I checked.

And I take that as a sign that this is one of those kind of obscure stocks that, you know, it's a small UK, small cap or mid-cap. UK listed stock. Can I pause you there real quick? No comments, but I will say several serious event investors did email me questions. So there are serious guys following this. And I just want to note, Connor's been covering this nonstop. I'm going to include a link to his

coverage in the show notes. So if you're listening, you want to read it, please follow the show notes. But Connor, sorry to cut you off. I just thought both those were nice addendums. Please continue. No worries. Thanks, Andrew. It's good to know somebody's interested in it. So yeah, it's one of these kind of smaller mid-cap UK stocks that has kind of really been forgotten and overlooked. So it's a, it's an 820 million or 830 million market cap

auto parts business listed in the UK. So it was a spin-off in April last year from another UK listed business called Melrose Industries. So Melrose was or is kind of a private, a listed private equity kind of turnaround specialist. And they bought a business called GKN PLC back in 2018, which is this auto business and another aerospace business, which they retained and still own. So following a kind of four-year period of restructuring, they spun off Dowley last year. And so this is really this business. It's an auto parts business. It comprises two segments. The main segment or the core business is about 80% of revenues, and that's GKN Auto. and then that has about 4.2 billion in revenues last year.

And then the other segment, a smaller part of the business, which is non-core, I suppose, at this point, and is kind of part of the event-driven angle on it, is GKN powder metallurgy. So that's kind of a specialty metals, metals processing business. That's about 20% of the revenues, about 1 billion in revenues last year. So, I mean, I think what makes this business interesting

is that it's, as I said, an 820 million market cap stock today, but the carrying value of the powder metallurgy business, or which I'll call it powder met, is about 860 million. So, you know, you've got some of the parts here that looks pretty interesting. And yet, I know usually people would say some of the parts don't work, but the difference here is that at the time of the spinoff management had flagged that they were going to consider, demurging or selling or exiting the powder-met business at some point in the future.

Over the last couple of months, they've announced a strategic review where they're now exploring the sale of that. The business separately at the time of the spin-off also owned a kind of a startup hydrogen technology business. They've sold that. It was loss-making, so that will actually be cash flow accretive going forward. So they've got rid of that. They're now looking at the powder-met business, which could be worth in excess of a billion pound sterling. Again, kind of, you know, exceeding the current market cap of the entire business, and then you're left with the core auto business, which is actually the global market leader in the auto components that it produces. So it kind of produces a kind of a number of auto components

kind of to do with kind of the kind of mechanical transmission. So everything to do with kind of moving the power from the engine to the wheels and rotating. So these are fundamental components. It's not like they're, you know, luxury kind of features or anything that could be added on to, you know, a car spec. These are, you know, fundamental auto components. So it's estimated one in two cars globally has a GKN auto component in it. And they deal with 90% of global auto manufacturers. And also, interestingly, just with the auto market, has obviously been very tough industry this year. And there's been much, you know, discussion of the.

slow down electric vehicles, except for Chinese manufacturers, which have really launched an assault on Europe and to the U.S. in the U.S. to a lesser extent. But interestingly... You got to be careful when you say China's launching an assault on Europe in the U.S. I mean, that's a whole different geopolitical risk we're talking about. Well, just in terms of, obviously, in terms of kind of just trying to grab market share like they've done with, you know, solar panels and countless other kind of products or in countless other industries. So, you know, the Chinese These electric vehicles are the one part of the auto market that you could argue are actually

doing well and that they're gaining market share, they're growing. And again, Dowley is a supplier to the top 10 auto manufacturers in China, including all the major EV manufacturers. So it's really well placed within that in the current market context. And then also just in terms of the classic debate or the debate in recent years between internal combustion engines, it's soon to be dying out, futures electric. I think we've kind of learned in the last six to nine months that the electric vehicle transition is going to take a lot longer than maybe previously assumed.

You see all the major manufacturers now pulling back investment plans. So again, Dowley has a pretty, what they call a kind of a power train agnostic portfolio. So the power train, again, is that mechanical kind of base of the car about, you know, the transmitting power from the engine to the to the wheels. So it, you know, they produce components for both electric vehicles. and for the traditional internal combustion engine vehicles. So they're kind of nicely balanced in that they can straddle both markets. So if the EV side of the industry is kind of slowing down currently,

they have got attractive exposure to the Chinese part of that, which is doing relatively well. And then also if there's a slow down electric vehicles and there's a slowdown in investment that, you know, if the global auto fleet is to continue to be, you know, it's aging, if it's to be replaced, people will continue to buy cars, internal combustion engines are cheaper and more convenient for the time being, that's also positive for Dowley because it already serves that market,

and it's the market leader in that segment in terms of the components it produces. So in terms of just the business, how the business is positioned, it's yes, it's in a difficult and at times cyclical industry, which is going through a tough moment at the moment, but medium to longer term, I think its prospects are pretty, pretty solid. and I think it's pretty well positioned across the different trends within the industry. Let me pop in here. That was a great overview. First question, I want to dive into a lot of things you talked about. I was pulling up some charts because I've been following this stock off and on

for pretty much since the spin, in part because of your coverage, in part because of someone else. So I was pulling up some charts, and as you were saying stuff, it was reminding me other stuff I wanted to ask. So we'll get into all that. But first question I like to ask everyone. Mark, it's a really competitive place. As I mentioned, multiple very smart investors I know who either emailed me when I said I was doing a podcast with questions, comments, concerns, or who I've just talked about this in the past, right? So this is not a known company. It's followed.

Markets competitive place. What do you think you're seeing that the market is missing that kind of makes this an alpha opportunity? Okay. So I think, I suppose it comes back to, I mentioned there, kind of how the business is positioned. And if you can take any kind of a constructive view on a medium term, forget about the short term. the next 12 months

we all know the headwinds that are facing the industry but on a medium term basis I think its prospects are solid and it's well positioned in that context that's just in terms of business quality business positioning that's I suppose that's that element covered more what makes it more interesting to me is as I've touched on already is the event-driven angle

whereby this is now an event-driven situation in that the powder met segment it looks like they will divest it and I would have thought when you look at kind of the kind of historic transactions, you know, private equity or strategic acquireer is more likely then a kind of a, you know, a share, share a spin-off. And on that basis, you know, when you look at, if you look at how comparable businesses to the powder met business have traded, so there's only one really direct peer,

which was a Swedish business that was acquired by private equity about 10, 12 years ago called Hoganus, that was bought for 10 times. EBTA. That's probably the most relevant. If you then look at kind of current listed businesses that are broadly comparable, you're really looking at a couple of US names, Carpenter Technologies, ATI, Amatech. They're more diversified businesses than Powder Met, but they, you know, they're trading at 16, 17 times EBITDA on an LTM basis. But then you compare Powder Met's free cash flow conversion and EBITDA margins to those U.S. listed businesses, and it holds up pretty well. You know, it kind of has stronger cash conversion than ATI and Carpentery, and it's kind of

73% free cash conversion, and it's got 15, 16% EBITDA margins. So pretty solid metrics, you know, compared to those peers. So if you put it 10 times, you know, they're trading at 15, 16 times. The private comp I mentioned traded at 10 times, oh, that's a very dated transaction at this stage. But, you know, it's not unreasonable to think that if this is worth 10 times. And you apply a 10 times multiple to that segment, the powder met segment EBITDA, you get a value of about 1.5 billion. Even if you allow for tax, leakage and costs and so on, you're talking value for that segment that should be worth in excess of a billion pound sterling. Again, you're looking at the market cap of Dowley today, and that's 830 million or so.

so you know you've got a transformative divestment there in terms of you know a billion plus in cash proceeds that comes back to the core business and management have already implemented a buyback it's a small but limited buyback 50 million pounds so small but it's it's you know with on a divestment you know you can see easily see scope for an expanded buyback and you know they've shown the demonstrated appetite for shareholder returns and or kind of a special dividend And, you know, so I think that event-driven angle is attractive. And then again, I suppose if you look at it this way, either, you know, the Powder Met business, the carrying value is about 860 million netbook value, you know, you know, in excess of that maybe

if it's traded to the private market, you know, so you're either getting that for free at the current market cap or if you back that value out of Dalai's current EV, it implies that the core auto business is trading it less than two times EBDA. And even in this market, which is challenged, and you look at listed auto peers like Dana Incorporated in the US, American Axel, Borg Warner, they're all trading it kind of four times EBDA. So, you know, even Vitesse, which I think Greenlighter, David Einhorn,

was pretty bullish on. That's been taken private by controlling shareholder about five and a half times EBDA. So, you know, so the core auto business, you're either getting the powder met segment which is a billion pound plus business for free or the other way looking at is that the core auto business is trading at a 50 to 60% discount appears so that's where that's where the value is and you would have to think now with all the negativity I mean this spun off at one pound one pound 46 share it's trading today or yesterday closed at about 60 60 pence so it's down like you know uh down significantly so you

You'd have to think a lot of the negativity is already priced into the stock. It's kind of a, it's a market leader in its niche, and it's priced like a penny stock, and it's got a segment that no one is valuing or reflecting in the market cap. So let me just stop it. So if I had to boil that down, what I think you're saying is, look, my, my varying view, is this whole company is priced like a pretty rapidly declining shell, right? Like we're talking about the whole company trading for, I don't know, I don't know. You tell me three and a half times EBITDA. Tell me about four times. About four times

EBITA, yeah. And you're saying, hey, I think the variant is powder met is a much better business than that. Look at peers. There haven't been a great transaction reasoning, but look at loose peers. My mouth, like, I think it could easily worth high single digits or more EBDA. And then when you do that kind of math, the implied on the Remain Co. It's just absolutely insane. Am I kind of boiling that down correctly? Yeah, exactly. Yeah. Yeah. I think, you know, if you look at kind of the private market comps, and I assume they're going to sell powder mesh, and then that leaves the core auto business, which, by the way, was also subject to a takeover bid in the past at the time Melrose bought the original predecessor business. I mean, it's, you know, you can make

an argument. It's likely too small on its own, or it's ripe for a kind of a strategic acquirer like Dana, who tried to buy it before at about seven times EBITDA back in 2018. So, you know, the core business, you know, so on a breakup basis on my numbers, it could be worth about £1.70 a share. If they sell Powder Met and it kind of, you know, re-rates over the next three years as the auto market kind of stabilizes again, I think it could be worth over £2 a share. So, you know, compared to 60pence today, you know, I think there's substantial upside. And then we look at the downside.

So, you know, I think it's, you know, at two times even down the core auto business, you know, a very attractive powder met segment that kind of covers all the debt. I would de-risk the balance sheet. You know, I think the downside is limited. I think a lot of the negative sentiment out there is already priced in. So, you know, at the kind of share price there. So I think it's a pretty asymmetric setup. I want to talk about history here.

And generally I don't like to talk too much about history. But there's two angles I want to talk about the history here. First, everything you're saying, right? Like the stock's been kind of a disaster since the spin. But let's just focus on the recent forecast. And, you know, it's the first thing. anybody's going to look at when they hear this pitch, they're going to pull up the stock try to just see like down into the down into the right, right? So I want to ask you this

history in a few different ways. Let's start with the recent history. There's a quote in your most recent article. It seems in the space of three months, Dalai's revenue growth has shifted from slightly low prior year to mid to high single digit declines, operating margin expansion in free cash flow. They thought they were both going to grow or expand declines now. So I just want to ask you like what's happened with the recent past and we can bolt on to that you know as you mentioned i follow several names in the other space the auto space has not been fun if you've been like an auto supplier of any form so what's happened in the recent past and how much of the issues are dalae specific versus kind of auto industry supplier in general macro all that type of stuff yeah so i mean

at the start of the year the kind of the outlook was for kind of revenue and you know modest revenue and EBITDA growth. And then there was a trading update in May, which kind of tempered expectations and kind of was essentially a kind of guiding down. And then more recently, the interim results, they kind of guided down again where kind of, you know, revenue is going to be down for the year now and free cash flow and EBITDA will also decline. And so that really, I suppose, spooked markets and kind of confirmed, or I suppose it was perceived to confirm kind of the wider, concerns around the auto sector in terms of all the headlines about EV slowdown and I suppose investors then kind of really started to exit the stock and you know it's it's kind of it's down

I think 40% or 43% year to date and a lot of that has come within the last couple of months with those kind of with that kind of reduced guidance and now in saying that results you know on a headline basis that that doesn't sound great but when you dig into the actual underlying business performance relative to the market and what's happening more broadly, you know, it's not as bad as it seems, you know, 75% of the business in terms of revenue is actually outperformed in the half year to the end of June, has actually outperformed the market in terms of, you know, the Chinese segment, the joint venture, revenue growth of 1.5%. So that's outperformed. The core auto business has actually

outperformed the market by about 1%. And really where this business has suffered is in the EV the EV components product lines. There's about four kind of platforms they call them that have really suffered. And the revenue is down, I think, 8 or 9% for the half year. And about 60% plus of that decline

is attributable to their electric vehicle component lines. And that's, we all know about that and what's happening in that part of the market. And so I suppose there's an element of that's just, that's where the market is at. And so, you know, also I suppose, you know, that you could level the criticism. Well, management were saying one thing, you know, four or five, five, six months ago and then two, three months ago, suddenly they've kind of really changed their tune. But in fairness, I think as well, when you look at kind of S&P mobility forecasts and other industry commentators,

they had similar kind of forecast showing kind of, you know, a pickup in volumes, vehicles. volumes, production volumes this year, and then they very quickly issued two reduced outlooks in the last kind of three or four months. So, you know, I think industry-wide, this kind of slow down in electric vehicles, which is really kind of what's behind the current issues, has kind of caught most people. This episode is brought to you by Teegas, the future of investment research. Look, if you've been reading my newsletters, you know how often I rely on Teagas for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Teegis, they've got the largest transcript library in the

world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, Teegas has the insights you need. What sets Tegas apart is its all in one platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Teegas, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you're interested in. You'll find perspective from insiders and executives that you can't get anywhere else. To see Tegas in action and understand why it's one of my go-to resources, visit tigis.com slash value. That's T-E-G-U-S dot com

slash value. Trust me, once you try Tegas, you'll never look back. Let me jump in here at Conner. So I'm with you. I think a lot of it is industry-wide. I'm not sure. I'm not close enough to download to know, like, is it 99% industry, 1% company, 50, 50? I suspect the answer is like, yeah, it's less than 99.1, I suspect it's the answer. But I do want to ask you this question, right? Industry's been cutting. But I've heard this argument for going on, I'm going to say six years now, right? Like, hey, go look at Karsar, right? It has come down since it started before COVID, right? But, you know, we're running at, I can't remember the exact rates. We're running at like 18 million, seasonally annually adjusted per year. Post-COVID, we're down to like 17, and now we're

kind of at 15. And I've been hearing for years, all these auto suppliers, all these automakers saying, hey, you know, once we get SAR back, you know, we're in a depressed SAR mode. And at this point, it's been, this is, again, I think it started pre-COVID. This point, it's been like five years. And I'm kind of like, hey, maybe this is the new SAR rate, right? Maybe we're not going back. And I think my numbers are correct. Maybe we're not going back to 18. Maybe 15 is the new run rate. And that would have a lot of implications, right? This wouldn't. I think people are worried about this being for a while. People were worried about this being internal decline as EVs took over the world. And I don't think that's coming back. But I'm worried about a structural decline where the whole

industry was set up to produce parts, cars, everything at 18 million. Obviously, I'm focusing domestic, not international, but I think many of the same things would apply. The whole industry was set up for that and now we're at 15 million and people are just starting to get that memo and they're saying, oh my God, we are way too much capacity here and there's still more pain to come. I realize I threw a lot out at you. I'm kind of asking us, but that's one of the key worries I have when I look at this or there's several interesting on any of the audio.

You know, GTX I've owned in the past and people tossed that one around around all the time. We'll probably talk about Finn to spend up. Like, there are a lot of other auto names that trade cheaply, and that's one of the big worries I have, not terminal decline, but kind of structurally lower run rate. Yeah, well, I think, I mean, I think when you look at some of the kind of the broader trends in the auto industry, I mean, certainly since, I mean, pre-COVID to peak globally, and it's important to, I suppose, emphasize Dowley is a global business. I mean, it's not concentrated in any one jurisdiction.

So, and again, 90% of the global, all the major car manufacturers you can think of are customers of Dowley. And I've been for a long time. So, I mean, they've kind of got global exposure. And then when you think about, you know, pre-COVIDs global passenger vehicle, but so this is cars and kind of smaller vans. So non-comitial or not heavy-duty vehicles. So that market was kind of 90, 95 million pre-COVID.

Kind of peaked around 2018, I think it was. Then it plunged into kind of 70 million, 72 million vehicles globally in 2020. And it's started, it's slowly rebounded since then. So I think this year, last year was about 90 million and this year it's going to dip now off the latest S&P global forecast to about 88 million and really in terms of kind of and Dallas talk about this in some of their investor on the investor calls and some of the materials about kind of stabilized or normalizing volumes and that's really I suppose getting back above 90 million which S&P are forecasting next year or 2025 and up to kind of 93, 94 million 2026 so you know for for whatever they're worth on terms of the latest forecast, industry forecasts, reflecting kind of the current state of affairs, you know, you know, the vehicle kind of production is expected to increase again. And, you know, what's driving that is you've got in the US, the US has, I think it's the oldest car fleet

in the US now that it's ever been. I think the average age of a car on US roads is about 14, 15 years. You know, you've got increasing kind of standards where increasing here in Europe and certainly in Ireland, older cars are getting harder and harder to keep on the roads in terms of, you know, there's additional kind of tests and so on that they need to do and that's a cost. That all adds up the older they get. And also then you've got kind of, again, if Dail is a global company and you've got increasing urbanization and mobility in some of the more developing countries and it's got good exposure into Asia as well. You know, there's a lot of kind of structural medium term kind of supports there for a rebound in volumes. So between population growth, urbanization, mobility,

car aging, safety, or kind of regulatory standards in terms of what kind of a car you're allowed drive on roads. I mean, they're all supportive. And I think, you know, you look at that kind of broader backdrop. And then again, you come back to Dowley's positioning in the market, as in it is the market leader in the components it produces. It has all the major relationships. that's unlikely to change. You would kind of think this is really a cyclical industry. It will and it should pick up at some point. And when it does, and it's forecast to do so within the next two or three years,

you know, Delaide seems well positioned to capture that. And in the meantime, it's likely going to divest of a non-core business and get a billion plus in cash. And you've got the core, the Remain Co, or the stub equity at less than two times EBITDA. on depressed earnings. That's LTM earnings, which obviously reflect the challenges of the last six months.

Yeah, I just, I wonder because, you know, as you said, it's two X off trow earnings, which is a nice place to buy something. But one of the concerns I have with this or any of the auto support suppliers I've been looking at is, hey, is this trow or is this the new normal? Or, you know, are we going to go from,

you mentioned 90 to 88? So you go from 90 to 88 to 86 for whatever reason. And it's just a concern that I've had. I'm sure, look, I'm sure if you and I were talking to here 10 years ago, I'm sure people would have the same concerns and then you saw our last all the time on. Let's go back to history here. Other history question I wanted to ask you. And this was a friend who pointed out, but you mentioned Melrose bought most,

bought this business through a bidding more. And I think there were other smaller businesses that were probably higher multiple that they divested. But I want to go back to the bidding, the bidding more time, right? Like that was 2018. That's not forever ago. What was the rationale behind the Biddymore? I think most of the attractiveness was these assets, which the market kind of hates right now, because I'm just trying to kind of read through, like, hey, can we learn anything from that

six-year-ago past that applies to today about, you know, yeah, it's cyclical, but if you look through this cultality, there's some value here. Yeah, so, I mean, Daly was originally, I mean, it's originally a part of, you know, roughly about just over half of a UK-listed business called GKN PLC. and so GKN back in 2017, 2018, I mean, it was kind of an industrial conglomerate. It had an aerospace business. It had the existing Dowley's businesses. It had some other industrial businesses that have subsequently been divested.

And so it had struggled. It had kind of perceived issues, performance issues. Melrose being a kind of a turnaround specialist, launched a hostile takeover for it. It kind of lasted about two months. months, management, previous management, who aren't with Dowles anymore, but prior to Melrose's ownership, previous management tried to avoid or tried to, you know, to rejected Melrose approaches. They try to get a White Knight deal with Dan, U.S. listed Dana Incorporated, buying the GKN auto business, which is 80% of the today's Dowley's business. And that was rejected by

shareholders. So Melrose won the takeover. They offered more money to buy the whole thing. And I think shareholders at the time, GKN shareholders at the time, probably had gotten tired of the former management team at GKN. So Melrose acquired the business, the entire GKN business for, I think it was about nine times EBITDA, about 8.6 billion pound sterling, but roughly about nine times EBITDA. Dana had bid for just the auto part of GK. of GKN at the time I think it was about seven between seven and eight times EBITDA which would have

equated to an enterprise value of about four and a half billion at the time and so that that was kind of they were kind of the valuations being attributed to the GKN business at the time and the

Adelaide's auto business and you know when when you think about the nine times multiple that was Melrose paid for for GKN, you know, the majority of that business, 60% plus of the old GKN business was Dowles, or the Dowles auto business and the Powder Mets element as well. So, you know, I think they're useful historic valuation benchmarks. And obviously there are a different time, interest rates, cost capital was lower then than it is

currently. But again, I think it's relevant. I think, you know, when you look it then Dowley's today so fast forward five six years it went through restructuring Melrose sold off

the kind of the heavy commercial vehicle element of the old GK and auto business they slimmed it down they trimmed working capital and you know

being turnaround specialists they just applied their model to it and then when they felt that they had taken the restructuring program to their

end point and they were more focused on the aerospace business which is what they they retained they spun off the auto business as dowles and they included the powder met business along with it because a significant chunk of powder met's end markets are is the auto market as well or other parts even though there are other industrial end markets for for powder met's products

so um you know we look at that history and those type of valuations and then you look at the valuation of dalais today and you think okay it's an 800 million or 830 million market a cap. It's a 2.3 billion enterprise value when you include net debt and some pension obligations. But as I said, when you back out the powder met valuation, that looks more like a two times multiple or sub two times multiple on the core auto business. It just, you know, for a business that has been tidied up and has a good management team in place, you know, and the different attributes, the positive attributes I mentioned there, you know, it just seems too cheap. great let's talk about a little bit about margins right so they they had previously been

gotten to margins expanding this year because of all the issues we've been talking about they're talking about margins contracting but they've done a lot right i think historically they've said hey new contracts are coming in correct me if i'm wrong new contracts are coming in at higher margins than our old contracts so that as the new contracts kind of kick in should be should expand margins i think they've done some restructuring i have seen a lot of auto parts suppliers do this I think they opened up new plants in Hungary and Mexico. You know, obviously those can be a lot lower cost places to manufacture than the United States. Let's pick one.

So I just want to talk to you about we're not getting the margin expansion this year. Do you think that is the margin expansion is never going to happen? And you can think of a lot of reasons why even as they're moving to lower cost places, the margin expansion doesn't happen. Or do you think this year is just unique and maybe 2025, you know, we roll the quarter, the corner, these guys give loose guidance. I could imagine they come out to 2025 and say, hey, volumes have stabilized,

all of the initiatives we talked about are kicking in, margins are going out, free cashers going up, and the stock kind of races as people can re-underwrite. So there are a lot to you. Kind of made it a softball twist hand, but I'd love to get your thoughts on just margin expansion and the initiatives they've taken. Yeah, no, it's an important question.

So I mean, yeah, so at the time of the spinoff, so management in the auto business, which again is the core segment 80% of revenue. So the target margin, medium-term target margin that they management are shooting for is a 10% EBIT margin. It was 7% in FY23, then half year, this year, 24, with all the issues that have been going on, it dropped to, on a headline basis, 5% because that's due to lower volumes, particularly on the EV side of the business, where the EV volumes are down, so components, sales have been down, and that, kind of hits the margin. So now, five percent sounds, you know, like a significant drop, but

what management actually managed to do, and I think it speaks to their ability in a difficult trading environment, is that they implemented some restructuring and cost-saving initiatives. So they passed on cost increases, you know, energy components, parts, labor costs, they pass that on to manufacturers. And again, because of their entrenched relationship with all these OEMs, A lot of them just have to take the cost increases. So they actually managed to deliver margins or EBIT margins of about 6% in the half year. And they're guiding 6 to 7% for the full year with some kind of pick up in the second half of the year. So, you know, so where are we today?

We're kind of in, we're kind of six and a half, seven percent is kind of the thinking current year with, with the benefit of management's cost initiatives and performance initiatives. So management have indicated that through some of those continued. cost initiatives and some of them are as you mentioned kind of they've closed a plant in germany uh you know german manufacturing is in a really difficult place and they've closed that plant and they've opened a new one in hungry and much lower cost uh jurisdiction similarly they've opened a new plant in mexico they've shut one in north carolina so that kind of near shoring um trend in terms of to kind of manage the cost base in difficult environment so management think that they can get margin expansion of about 200 basis points

just through cost initiatives, even if car volumes, production volumes, stay where they are. So kind of sub 90 or kind of high 80s. And so how do you get from that? So you got six, you got maybe two percent then that gets you to 8 percent with just performance management initiatives and management. And then that leaves you a 2 percent gap to get to your 10 percent target. And what that needs really is volume pickup over time. And you know, kind of back above 90 million units by cars by next year, that should get them to a 9% underlying margin. And then beyond that, then it's, you know, through, I suppose, a combination of maybe if it continues to improve back to kind of towards pre-COVID levels of, you know, kind of low 90s in terms

of production volumes and maybe some further kind of cost initiatives, initiatives from management, you know, that kind of, there is visibility there to the 10%. And, and, and, you know, I think does that require you to kind of hope that management can deliver? I think, yeah, obviously, you kind of management, you kind of have to back management here in terms of delivering that. And they've already in, you know, the last six months, they've, they've insulated margin by about 1% while volumes have been down unexpectedly. So, you know, they've shown, you know, I think a good degree of competency there in terms

of protecting margin. And if volumes, if and when volumes do return, I think that gives good, you know, you know, know, that shows that kind of 10% I think is within sight. And, you know, in terms of my own analysis, I kind of, I'm assuming kind of, you know, FY26, FY27 kind of two, three years out from now, even at 8% EBIT margins on the auto side, which is what I'm assuming. I'm assuming kind of a kind of a, I'm not assuming the management case and I'm still getting a kind of of a value of, you know, over two pounds of share on that basis. And that, obviously that includes kind of monetizing the powder met segment as well.

But, you know, so I think, you know, margins, I think can they get to 10%. Yeah, I do. Yeah. You mentioned management a few times in there. Earlier, you'd mentioned some management insider bias earlier this year. So I just want to pause there and ask, I mean, we don't have to compare management here to see jobs or anything, but I want to pause here and ask two things on management. Like, how do you view the current management team would be one, you know, because I think

people could take two views. Like, hey, their adults are really effing tough. would be one or number two would be, hey, these guys, you know, they're getting, they're, lowering guidance every year, the stock spent disasters, the spend. These guys have no clue what they're doing. So I think both views could be looked at and you could debate fairly. So I want to take your view of management. And then the second thing, I mean, any spinoff, the first thing I'm always looking for is incentives, right? The incentives of the management team, the incentives of the directors. Obviously, there's been some insider buying, but I'd love to just talk about the

incentives of the management team. Like, are they aligned with shareholders here? So you can start at either one you want, but I'd love to talk about both of them. Yeah, I think, okay, just taking kind of two sides of that. So, operationally in terms of competency, I think, yeah, I think management are good. So the first thing I suppose to kind of point out is that the management team here, these are, the current management,

are the management that Melrose installed when they took over the business and went up, embarked on their kind of turnaround plan. So these aren't the legacy managers that were involved pre-Melrose and pre-Spin. So the current CEO was brought on board by Melrose and

he was the guy that led the kind of cleaning up of the business under Melrose ownership and he stayed with the business post-spin so you know so he kind of he's you know he knows he knows the business he understands the business he's a good operator

and I think you know in terms of the measures they've taken this year I think they've shown you know in terms of cost management and protecting margins and shown operationally I think they're good managers they're good operators and I think you know you can take some degree of comfort in their ability to kind of, you know, to drive this

business on and to kind of, you know, as the market improves, they'll capitalize on that. In terms of incentives, okay, so there isn't a huge amount of insider ownership in this, and that's the one thing I'm less happy with in terms of the situation. You know, the management don't, there isn't a huge amount of insider ownership. Now, there is, there are incentive plans in place that, you know, incentivize management to kind of buy stock and, you know, performance linked, you know, share awards and, you know, they could end up owning, you know, if they hit their targets, they'll end up owning, you know, a decent chunk of the company, or, you know, a decent chunk of the company and that certainly would kind of align them with, with, with the rest of the shareholder base. And I think, you know, they, they've kind of. they've, they're, sorry, lost my train of thought. No, no.

On the, on the incentives. So, yeah, the incentive plan, sorry. Yeah, the incentive plan. So it's linked to a kind of, you know, total shareholder return metrics, free cash flow, operating profit, growth. So the kind of things you would want to see in terms of metrics to kind of hold them to, you know, to account. So I think, I think they are well incentivized to try and, you know,

turn the business around from the current kind of, you know, the challenges that it faces. No, that's great. So let's talk about the incentives a little bit because that is the one place where when I looked at this a few years ago, I remember like, oh, I was kind of hoping like you spin off this low multiple business that spits off a lot of cash flow. I was kind of hoping, you know, pulling numbers out of thin air. I love it when I see, hey, like, you know, the stock is spinning at 200. We're giving management, you know, a huge stock option bonus. five years options struck at 300, right? Because if you goes 200 to 300 over five years,

people aren't going to be thrilled, but they'll be generally happy. That's a very nice IRA, right? Not the best in the world, but, but, you know, if you give them options at, and again, I've just pulled the numbers out of it there,

if you give them option to 300, they actually have to get it well above 300 for those options to really be worth it. So you've got like a greedy, incentivized management team. And I've heard people say, you're like, look, you've got the insider buying. I think some of the directors,

you can correct me if I'm wrong, or if you don't know, that's completely fine. Somebody mentioned to me, some of the directors have a really interesting incentive plan that expires next year and it would require the stock to get a lot higher. You've got a buyback coming. But at the same time, I look, I'm like, hey, for a business that's kind of just supposed to be not a growth business, you know, kind of cyclical and steady, the stock buyback is pretty small here. Maybe that changes if they sell powder. But, you know, I'd love to see them just ingesting shares and destroying the share count.

I don't think I see a management team that's like yolo incentivized here. So I'm of two minds. I'd love to just continue the conversation with you on the incentives. Yeah, so no, you're right. Firstly, just on the point on the buyback, yeah, I suppose it's a small, it is a small buyback. I suppose that's constrained by the capital available at the moment. I mean, you know, they post spin-off, they have some debt.

They're trying to de-leverage that. They've earmarked the powder met segment to, you know, to, to sell that and when they do that that will transform the balance sheet and will give it plenty of scope for much stronger capital returns do you think if they sell powder met do you think we start seeing like I've seen this in several

some of the UK companies that we've followed together they sell the division and then it's a huge capital return whether it's OCI with huge dividend or here it'd be really nice if they just said hey we sold it for a billion we're going to buy back 20% of our shares in an ASR or something do you think that's all plays out? I would think that's how

what they'll do. Yeah, I think they might go for, you know, a buyback and maybe a special distribution, some kind of combination of the two. But certainly a buyback or an expanded buyback would be the logical one. I mean, just because it should be so accretive just given the current valuation. So I think that's just on the buyback point. And then on share, okay, insider buying recently, the CFO and the CEO have started buying share. they're buying shares when it dipped below 60 pence there recently. So I think that's kind of a sign of confidence in terms of going out into the open market and buying stock when obviously they feel it's on the floor.

So I think, you know, that gives you some kind of comfort that management are kind of, you know, they see value there. And then in terms of, you know, kind of the broader incentive scheme, I think, you know, they get share awards. I think they're incentivised to, I think it's to build a stake of up to 300% of their annual salary in stock. And so that's kind of a, you know, there's a kind of a, I suppose, a pathway there for them to build, build a shareholding in the company. And that only becomes more valuable then if they do implement a buyback, a bigger buyback down the line. And they're holding, you know, they own a bigger slice of the pie then in that instance.

no look it's great point i guess the two things and again this can be one of the tough things with cyclicals or with companies in general but the two things that you're about is a they did a share buyback or sorry they did insider purchases this quarter but they also did last quarter when the stock went from like you know last quarter the stock goes from 120 to 90 and they come and buy about 500 000 shares on the open market and then this quarter the stock goes from 90 to 60 and they buy about 500 000 shares on the open market so i'm kind of like hey do these guys see value or is this just, hey, let's, you know, try to boost the market's confidence a little bit. Obviously, they need to get to that three times hurdle, which isn't, you know, that's, that's kind of

standard. So I could be of two, two minds of that. And then I was trying to flip through and find, find the incentive structures on here. Like, I do see the ingested cash flow and everything. I just can't find it. But yeah, I don't see anything that says, like, these guys are being super greedy because what I always worry about is, this isn't just a DLA specific thing. But, you know, If you're an exec who doesn't own a lot of stock, then you're not really incentivized to catalyst yourself because the value's there, right? You just be like, look, next year, I'll go buy back to stock. But in the meantime, I'll accrue more options at a cheap price or I can buy stock on

the open market at a cheap price. And it doesn't really matter to me. I'll do it next year. I'll sit on that cash. I'll sit on that cash and earn interest income or, you know, the real negative fear would be they sell powder met for a big multiple. And then alongside it, they say, hey, we're going, we're doing this super synergistic acquisition and doubling down on the core business, you'd be like, no, the core business

treated it too. So I just, those are the type of management assignments. And I need to do more work on that incentive structure as well. But that's one of the things where I just love to see spins where they come out and you're like, oh my God, these guys are, these guys are greedy for shares. These guys are hungry for it. These guys want to get the stock working. Yeah, well, I think, I mean, like, I, yeah, as I said, I think, you know, the level of insider ownership and, and, you know, I suppose that, and that goes to incentives. I suppose that's the one area where, you know, you would like to see more, you know,

a stronger kind of set up in this company. But I think, you know, you have to look as well, though, at the actions that they've taken. They, you know, this is a newly independent company. And in the space of 18 months, you know, prior to kind of the half year update, the numbers had actually been pretty good until kind of the slowdown and started to hit the market

kind of by Q1 this year. But prior to that, year-on-year growth had been solid, free cash flow generation had been good. They were, you know, doing as if they said they would. They said at the very outset that they were going to look at, you know, selling powder mesh. They seemed to be in the process of doing that. They got rid of the hydrogen startup, which was loss-making to kind of, you know, to kind of boost earnings because that was burning cash. They have, they launched a buyback. It's a limited buyback, but it's probably about as much as they can allow for at the moment.

until volumes pick up and or powder met could be monetized. They're buying back stock themselves. They've implemented some really, I think, important performance initiatives that have protected margins. So, I mean, they have taken a number of measures that show, you know, they are trying to, you know, create value or unlock value for shareholders. They are trying to steady the ship at a difficult moment in the industry. And they're taking actions. They're not sitting back collecting big salaries and kind of just saying, oh, it's the market. There's nothing we can do.

They are actually doing things to try and create value or that will generate value in time for shareholders. They sell powder met, right? Let's assume they sell powder met for. What's a mid-case number that you think they'd sell powder-met for? I think, you know, it could be $1.1 billion, something like that. Let's use $1 billion to make the number is easy. And the enterprise value right now is $2 billion to make the numbers easy. And I'm actually, we'll adjust it in a second.

But they sell it. They're left with a core business that's trading for about a billion dollars EV. Actually, I was $100 million too punitive on both ends. So it's actually closer to $800 million. But let's use the $800 million. And not that I've walked people through that math, right? $800 million, we've talked about it's trading for me, the stuff business is trading for maybe two times EBITA.

So $400 billion is in EBITA. Tell me if I've been wrong with any piece of that and hopefully it's trial. I guess my question is, what's the end game for that business, right? Because we could pay in a lot. We could say, hey, they sell it. Their debt problems paid down. The selling the powder met basically pays all their debt. Now we've got a return of capital, sorry, right?

These guys get the memo. They get the memo that oil and gas companies got in 2022, that most cyclical companies have gotten at this point, hey, investors aren't going to fund you, buyback shares, return the capital, you're a return to capital. They get that memo. That's number one. number two my big worry with a company that doesn't have huge shareholder incentives is they go buy something right hey we got a billion dollars we sold an asset for 10x let's go buy a bunch of assets for

3x this business is going to be way bigger we can pay ourselves bigger salaries bigger bonuses you know shareholder value be damned we're bigger we deserve more that's number two number three chairman it strikes me uh i'm looking at the proxy right now he's appointed he's appointed when the spins. He's got 35 years of investment banking experience, including Dutch sells $52 billion takeover of BG Group in 2016, retires from investment banking in 2021. He starts his career in 85, so he's probably about 65 years old. CEO starts his career in 86, probably about 65 years old. He was at Melrose. Melrose has a lot of history with acquisitions stuff. I'm sure he picked up something through osmosis to them, you can tell me that you've got some old guys who are

setting up to sell the business and put themselves into retirement, right? So I laid up three options. Share buyback, return a capital story, go grow, go grow stuff story, sell the whole company story. Which do you think it would kind of play out as post a powder met sale? Yeah, I think, I think what will, I mean, they've demonstrated kind of, you know, an appetite or an awareness of trying to drive shareholder return. So I think they sell a powder met, then that stabilises the business, provides scope for capital returns of some form, whether it's distributions and or buybacks, at which point, you know, based on current market forecasts, the industry volumes should recover, pick up again, so earnings should grow.

And at that point, you know, it's, you know, you have to remember as well, the auto industry, it's going through a lot of upheaval at the moment. auto parts is fragmented and I think you know you've got a remaining the Remain Co is a

you know market leading auto business with you know today 800 million market cap maybe that goes to a billion or more once they sell powder mesh and return capital

or return cash so you know that's still a small to midcap business you would think consolidation is going to happen in the market and I think it's more likely

that the Remain Co here gets acquired by, you know, you look at Apollo buying Tenaco there recently, you know, a couple of years ago. And you look at Dana previously tried to buy the auto business here of Dalai's back in, back in 2018. That's a logical combination, you know, as a strategic acquirer. So I, I would think they return capital post-powder match. And then, as you rightly pointed out, in terms, you look at the profile of and the experience of the management of the team and the people on the board. These are

M&A guys. They've been in this since 2018. You know, it'll be the gut, you know, nearly by the time this thing turns around, you know, in terms of market recovery and volumes, it could be, you know, nearly 10 years, these guys being involved.

It would seem an obvious kind of sale of the business situation then at that point where, you know, as strategic or a private equity require comes in and pays an attractive multiple to buy out the Remainco

and that's how shareholders today will get paid. One more question on Daly. As we've talked through this, I think we've done a nice job addressing industry, addressing history, all this sort of stuff.

As we've talked through it, it's become clear to me that just listening to you and I just hadn't put two and shoes together maybe because I can be slept. A lot of this thesis is resting on the powder met sale,

right? Because the whole, the consolidated company trades for, call it 4X, but a huge piece of this thesis you said when I asked you what your very view is Powder Met sells for high single low double digits and you've listed in your article you listed at the start of this interview you listed all the reasons for that but I guess

when I who's the buyer and what gives you confidence like I do worry just again there's more to auto there's more than auto at Powder Met but I do worry when we start talking about the last transaction was 2013 in this space or the 2018 Biddymore the space is a evolved a lot. It's kind of trial times right now. And I kind of worry, oh, if they get eight instead of 10, six instead of 10, the whole thesis kind of starts to fall apart on itself. So I just want to ask you about your confidence in the powder met multiple sales process happening, all that. Yeah. So I think, I mean, I suppose firstly, who's the buyer? And you know, and you mentioned there, the old, the only, the really direct comparable, it's, you know, it's 2013, I think,

when that traded, I mean, but that kind of reflects, I mean, powder metallurgy as an industry is a pretty small, I mean, as in there's not a wide number of players. There's only a handful of players in it. Dahlia is powder met business is the number two player globally behind Hoganus, which was the Swedish company taken private in 2013. So they're the top two kind of pure play powder met players in the industry. So who, who, Who's going to, so it's, it's an attractive asset in a specialty niche industry with, you know, as I said already, 15, 16% EBITDA margins, 70% plus free cash flow conversion. So, you know, and it has a number of industrial applications around markets, not just autos. So I think, you know, it's a reason. And if you look at the kind of historic trading over time, it's pretty stable. I mean, there's not a huge amount of fluctuation in powderment revenues like you would see, you know, in an auto parts business, a more conventional auto parts business. So it's kind of a bit more stable in terms of the profile.

So I think it's a relatively attractive industrial asset for an acquire, whether that's a private equity player or whether that's some of the US comps that I meant, the listed comps where they're in powder metallurgy and other kind of alloys and alloys related industrial processing or metals processing. this could be a fit for them as well and within its segments in the powder metallurgy industry it's kind of either number one or number two and in its in its subsectors so you know it's an attractive asset it would appeal to other industrial players or acquires or private equity mid-market private equity so I think that's in terms of the buyers I think and that's

kind of gives a sense of of who would buy it and And I think, but just back to your other point as well, does the whole thesis hinge on a sale of powder mesh? It's certainly, I mean, it's a, as an event-driven situation, which is how I'm looking at it, it certainly it is the main, one of the main thesis points. But, you know, as well, just to go back to the business's positioned quality within the industry, its exposure to the different, you know, end markets, you know, within where there's China and Chinese EV production and so on, It's, you know, auto parts is a cyclical industry and while it's going through a tough time at the moment, you know, it's very reasonable to think that volumes will pick up and recover again over a medium term and this business will obviously benefit from that as one of the leading, leading suppliers in that space. So I think that, you know, a fundamental business turnaround story or volume, market volume recovery story is also a thesis.

here um you know for for for the business with them powder met i i'm just trying to make sure i understand it like i i read you right up and looked at it and as you're talking i was kind of looking at the way i said i understand what they do right they take i correct me if wrong they take brass into a bunch of powder and instead of heating it up to shape it they basically press it together to make it right yeah exactly so they take they take metal like say bronze or something like that in powder form and they compact it uh into shapes or using molds into a with heat but not melting it. And the reason that you do that is that

it forms, it's easier to shape and, you know, for various kind of components in industrial manufacturing, all those, you know, everything's different shapes and they have to be a certain way. And so it's easier to form rather than melting things down and letting them cool and so on. So it's a kind of a more efficient way of producing hard-wearing metal components that could be used for

all those and industrial parts. So that's what it does. So it's a very fundamental industrial business. I have a question, and then I have something that lightbulbed, as you said, that question is, why isn't this cyclical? It is cyclical. Why isn't it more cyclical? I'm kind of surprised this isn't more cyclical just because that seems like about the type of thing that's extremely exposed to industrial auto, like, all that. It seems like it should be about as cyclical as it gets.

Yeah, but I think you think of the range of uses, it's not just an, I mean, autos is a big end market, but I mean, like these aren't kind of. of again these components are critical components they're not like you know for special you know add-on features in equipment or in vehicles i mean these are you know fundamental essential components so they go into everything a certain stock has of them has to be maintained um and you know manufacturers buy them you know you know buy them in bulk so that there's always a kind of a ready-made store of them available for for production so um you know it's just it's it's um as suppose over time, it's just, it's a, it's a less variable. The demand seems to be less variable than kind of, you know, conventional kind of auto parts. I'd like to do more, but I guess the

reason jumps out to me, because you mentioned in your write-up, hey, the carrying value here is about 860 million. And when we're talking about selling it for, you know, a billion dollars is, um, the thing I was going to push back, I was like, hey, this, as I look through it and this seems like something that's very commoditized, very, uh, it's. It's very commoditized, right? If you're going to sell it, like, why should I give it a multiple? Why should it get a return on capital? But then the answer is, hey, it's on their books for $860 million, right?

Like, Connor is not talking about selling this thing for a big premium to the asset value. He's kind of talking about selling it for asset value. So that was just like something interesting that clicked as we were talking. Yeah, sorry, there is that point. And also the fact that, again, as I said, there's only a handful. I mean, there's Hoganus, there's a dialy's powder met business. And there's only a handful of other, you know, it's not like there's a whole range of suppliers in Powder Met that different industrial businesses can go and buy components from it's a, you know, it's an oligopoly, I suppose, in one sense. So, you know, you've got a limited, there's a limited number of places you can go to buy these, these types of metal components. So, and, you know, the Powder Met business here is one of the main players. So I suppose that again, I suppose kind of, um, my, kind of explain why there's less variability in that it's a more of a closed market in terms of

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fingertips. The best part? The insights you get are from the very people-shaping the industries you're interested in. You'll find perspective from insiders and executives that you can't get anywhere else. To see Teegis in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's t-e-g-us.com slash value. Trust me, once you try tegis, you'll never look back. Anything else we should be talking about with Dallas or anything? I think we've done a pretty good job.

I obviously need to do a lot more, both based on this conversation. And I got kind of close, fortunately for me, well, I say fortunately, I got kind of close maybe nine months ago, so I'm still kind of relying on some of that research. But, you know, I say fortunately, but I'm sure all the stuff I invested in has been just as slashed as this. But anything else we should be talking about with Talley? No, I just, I mean, I think it's, again, it's one of these stocks that, you know, it's, it's a spin-off.

So, I mean, it's all, you know, the, you know, the, in one sense, the declines and the share price declines and it's been spun off, isn't that surprising. You've got a lot of mandated selling by, you know, Melrose, former parent shareholders that don't want to own a small cap auto parts business. but I think it's one of these stocks that no one really looks at it you think about people like David Einhorn who spoke about the market structure it's broken on the certain stocks, value stocks that just

there isn't a bid for them and I really think this is one of them and when you look at you know when you look at a headline basis you think you know four times EBITDA consolidated basis auto parts name UK listed you know which UK has been out of favor

in terms of you know well known that UK stocks have been much cheaper than kind of U.S. peers, for example. So, you know, it kind of ticks all the boxes of why people would not be interested in, our investors shouldn't wouldn't be interested in, you know, it's where it's listed, the industry it's in, what's going on in the industry at the moment. And that kind of, you know, that explains, I think, why it's cheap, why it's overlooked. And then, you know, when you look under the bonnet here and you look at kind of what's actually within this business, it's not just an other parts business. There's a very,

valuable industrial metals business as well that isn't really reflected in the price. So I think it's one of these, it's one of these kind of, you know, classic overlooked stocks in an unpopular part of the market. And I think, you know, back to kind of the earlier point about, you know, the, you know, who buys this or how does it kind of, how does it all play out? I mean, you know, if they sell the powder met business, it's probably too small to remain an independent publicly listed company at that point. And it seems like a very, very ripe candidate for a mid-market private equity, you know, takeover. And I kind of think, you know, that's kind of I think, you know, if the public markets don't value this properly, the private markets eventually

will. If I could just add one thing. And another thing that as we were talking that jumps out to me as interesting is goodwill on a balance sheet, right? Whatever. It can mean anything, stocks can trade anywhere, whatever. It's an accounting function. But I am always kind of interested, you know, these guys, so they're book value and you correct any numbers you want to that you think I'm wrong on or anything, their book value is about $2.2 billion here. And all of that, all of that is goodwill, basically, right?

So if you took out the goodwill, their book value would be about zero. So it's not like it's negative tangible equity or anything. And these are businesses. So whatever. But I'm just always. interested in that because they just took a big write-off of their goodwill at the end of last year, right? They wrote off Powder Met Goodwill by about $400 million, and I think they wrote off some other assets. So, yeah, it was a pretty nice write-off. And I'm always interested in that

because, look, when they test these, they put in their assumptions, they tell you, and they took a write-off. They didn't write-off to zero. They wrote off their goodwill to about $2.2 billion. And so they told you at the time when we, you know, run our DCF, whatever, that's what we kind of think the business is worth above tangible assets. That's the only way you can get to that $2.2. Now, have results since then been worse? Sure. Has the industry kind of trow started to trial, started to trial, hopefully started? Sure.

But, you know, they said it was worth $2.26, nine months ago. The whole company's worth a billion now. Like, it's a pretty interesting discrepancy. I don't know if you want to talk anything there. I was, I mean, I think that was one thing. It's ironic that, you know, the, you know, when they announced that impairment charge last year, and, you know, it was, it related to the powder met business and everyone, the, the kind of, the market reaction was, oh, there's problems with the powder met business.

It's struggling, there's something going wrong, you know, wrong with it. It, you know, reported, I think revenues, I think, were pretty much flash year on year. EBITDA was flash year on year. So it's not like it, you know, there was a profit warning or a nosedive in earnings and that segment. The write-off, really, I think, was two kind of factors behind it. So interest rates, so the discount rate had gone up because interest rates have gone up. Yep, yeah. From, you know, compared to December 22 to December 23, you've got a big variance there just on that alone. And then I think they paired back some of their forwards or future growth expectations. Yeah. Not that it

wasn't going to grow, but just that instead of, you know, forget the actual growth rate, but they paired it back to something like a two or three percent growth rate as opposed to something higher than that. I'm looking at it. So I can tell you right now, as you said, the discount rate goes from 12% to 13.4% and the long term growth rate goes from 3.9 to 3.3. And there's interesting language around. It says, manageable leaves this business has promising longer term prospects, but the medium term is lower than we thought it was. So, you know, again, accounting contract that is dated, but it's just something that struck me as interesting because, you know, I think powder met's kind of been on the table for a while. And when you take that,

goodwill write off. I've seen crazier things than someone writing a goodwill down from a billion to 750 million and then selling it for 300 million the next day. But you know, you generally, it's not a great look. You generally kind of slash these to a level where hopefully absent a huge another turn or something, you're not having you slash it or you know that if you're selling it, you know that the bids aren't too far off it. So anyway, we have talked a lot. I wanted to pounce through a few other things, but my parents, my, my, my, my, 10 months old grandparents are in town and sometimes it feels like they're fantastic. I love having them.

But every now and then around lunchtime or something, I kind of feel like they need more babysitting than 10 month old. So I'm going to have to run there. But Connor, it was fantastic having you on for the third time. Linked to the Dalai, and you've heard quite a lot on this, link to it in the show notes. People should go check out value sits. And I'm looking forward to having you on for the fourth time. And one day, either I'll go across the pond, you'll come across the pond and we'll put

some alumni, because we used to work for the same firm, we'll put some alumni faces and full bodies and everything together. But thanks so much for coming on. Looking forward to the fourth time. Sounds good. That's great, Andrew. Thanks for having you on. Enjoy the conversation. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.