RBC has cut its rating on Dowlais Group PLC (LSE:DWL) from 'outperform' to 'sector perform', arguing that the US takeover by American Axle Manufacturing is now largely reflected in the share price.
The bank has nudged up its price target to 77p, in line with the implied value of the all-share offer, leaving little room for upside from current levels.
Back in January, Dowlais and American Axle unveiled plans to merge.
Holders of Dowlais stock are set to receive 44.8p in cash, including a 2.8p dividend that has already been paid, plus a small slice of new American Axle shares.
On today’s numbers, the package equates to about 77.3p per Dowlais share, compared with a market price of roughly 76p. With only a wafer-thin discount left, RBC thinks it is time to temper expectations.
The broker still believes the bid undervalues Dowlais, which owns the automotive supplier GKN Automotive and a Powder Metallurgy division.
The group’s technology is deeply embedded in the shift to electric vehicles; its sideshafts, which transmit power to a car’s wheels, are fitted to nine of the world’s ten best-selling electric models.
That should allow it to sustain revenues even as demand for petrol and diesel parts ebbs.
Powder Metallurgy, while more exposed to the decline in combustion engines, has opportunities in areas such as additive manufacturing and electric motor magnets.
Margins are another attraction. Management has targeted more than 10% profitability in its automotive arm, which would put it at the top end of the global peer group.
RBC reckons two-thirds of that improvement can come from “self-help”, industry shorthand for cost savings and efficiency measures – with the rest dependent on higher sales volumes.
Even so, with the merger expected to close in the fourth quarter, the shares are now tied to the fate of the deal.
If, for some reason, it falls apart, the analysts see plenty of long-term value. Their upside scenario imagines Dowlais climbing to 200p, while the downside case, based on weaker demand and lower valuations for its divisions, comes in at just 20p.
For now, though, RBC’s message is simple: with the stock already trading at the offer price, the American Axle bid leaves little scope for further gains.