Expanding into adjacent steelwork sectors

Severfield 3 March 2021 Update
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Severfield

Expanding into adjacent steelwork sectors

Acquisition of DAM

Construction & materials

3 March 2021

Price

76.8p

Market cap

£237m

Core net cash (£m) at end September 2020

19.5

Shares in issue

308.0m

Free float

100%

Code

SFR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.4

11.6

(9.4)

Rel (local)

7.5

8.0

(11.0)

52-week high/low

83.0p

51.8p

Business description

Severfield is a leading UK structural steelwork fabricator operating across a broad range of market sectors. An Indian facility undertakes structural steelwork projects for the local market and was expanded in FY20.

Next events

FY21 year-end update

April 2021

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Severfield is a research client of Edison Investment Research Limited

As the end of FY21 approaches, Severfield is deepening its structural steelwork capabilities with the acquisition of DAM Structures. The strategic fit is sound and the deal enhances full-year earnings by c 7% on our estimates. We now expect Severfield to end FY21 in a modest net debt position.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/19

274.9

25.1

6.8

2.8

11.3

3.6

03/20

327.4

29.1

7.9

2.9

9.7

3.8

03/21e

354.5

22.4

5.9

2.9

13.0

3.8

03/22e

365.3

26.9

7.2

3.0

10.7

3.9

Note: *PBT and EPS are Edison normalised, excluding pension net finance costs, intangible amortisation and exceptional items.

Excellent strategic fit

Severfield’s acquisition of DAM Structures brings earlier construction project involvement and significantly strengthens its presence in the rail/transport sector. Like Severfield, DAM offers design, engineering and installation services to main contractors founded on core steelwork fabrication expertise. Project structures can be either permanent (eg bridges, gantries) or temporary (eg propping, façade retention, support structures) and end customers include rail (eg Network Rail, Crossrail, London Underground) as well as some other non-rail customers. DAM’s fabrication facility is in east Yorkshire, only c 60 miles from Severfield’s main Dalton site and c 20 miles from Severfield P&P (Sherburn); this group footprint increases the capacity available to DAM if it is successful in winning new business. Other group benefits that one might expect to accrue include enhanced materials purchasing, contract management and administration functions, and deeper main contractor relationships.

Full-year earnings enhanced by 7%

Having reported FY19 (to October) revenue and PBT of c £22m and £1.9m, we infer that DAM’s trading in the latest, COVID-19-affected, year was at comparable levels. The initial consideration is £12m on a cash- and debt-free basis (funded by cash reserves and a new term loan); a deferred payment of c £7m is expected to be paid in April 2022. Factoring this in, our revised estimates are c 7% above previous levels (for FY22 and FY23). Note that further contingent consideration may become payable in tranches (up to £8m in total) based on commercially acceptable new business won over the five years to April 2026.

Valuation: Favourable reaction to DAM

Severfield’s share price has responded well to the DAM acquisition and is up c 5% ytd. Looking beyond the COVID-19-affected FY21 trading year, we expect earnings to exceed FY20 levels in FY23, by which time Severfield’s rating compresses to a P/E of 9.5x and EV/EBITDA of 6.2x. At current share price levels, the prevailing dividend yield is just below 4% on our estimates.

Exhibit 1: Financial summary

£m

2014

2015

2016

2017

2018

2019

2020

2021e

2022e

2023e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

PROFIT & LOSS

Revenue

 

 

231.3

201.5

239.4

262.2

274.2

274.9

327.4

354.5

365.3

376.9

Cost of Sales

(217.8)

(186.7)

(219.6)

(236.3)

(244.9)

(244.6)

(292.6)

(322.7)

(329.5)

(338.2)

Gross Profit

13.5

14.9

19.8

25.9

29.3

30.3

34.7

31.7

35.7

38.7

EBITDA

 

 

12.0

13.6

18.9

25.7

29.1

29.0

33.2

28.6

33.6

37.2

Operating Profit - Edison adjusted

 

8.4

10.0

15.2

22.1

25.4

25.3

29.3

24.2

28.5

31.6

SBP

(0.2)

(0.5)

(1.1)

(2.0)

(2.0)

(1.6)

(1.8)

(0.5)

(1.0)

(1.5)

Pension Net Finance Costs

(0.5)

(0.5)

(0.5)

(0.5)

(0.6)

(0.4)

(0.4)

(0.4)

(0.4)

(0.4)

Operating Profit - company norm

 

7.6

9.0

13.7

19.6

22.9

23.3

27.0

23.309

27.060

29.714

Net Interest

(0.6)

(0.5)

(0.2)

(0.2)

(0.2)

(0.2)

(0.7)

(0.9)

(1.2)

(1.2)

Associates

(3.0)

(0.2)

(0.2)

0.5

0.9

1.7

2.4

(0.5)

0.6

1.3

Intangible Amortisation

(2.7)

(2.6)

(2.6)

(2.6)

(1.3)

0.0

(1.4)

(2.9)

(2.9)

(2.2)

Exceptionals

(5.3)

(5.9)

(0.9)

0.8

0.0

0.0

(1.4)

(0.9)

0.0

0.0

Profit Before Tax (norm) - Edison

 

4.5

8.8

13.7

20.3

24.1

25.1

29.1

22.4

26.9

30.2

Profit Before Tax (norm)

 

 

4.0

8.3

13.2

19.8

23.5

24.7

28.6

21.9

26.5

29.8

Profit Before Tax (statutory)

 

 

(4.1)

(0.2)

9.6

18.1

22.2

24.7

25.8

18.2

23.6

27.6

Tax

1.4

0.3

(1.0)

(2.7)

(4.1)

(4.5)

(5.4)

(4.2)

(4.9)

(5.4)

Profit After Tax (norm)

3.1

7.4

11.4

17.0

19.6

20.6

24.1

18.2

22.0

24.9

Profit After Tax (statutory)

(2.6)

0.1

8.6

15.3

18.0

20.2

20.4

13.9

18.7

22.3

Average Number of Shares Outstanding (m)

295.8

297.5

297.5

298.9

299.7

303.1

305.4

307.2

308.0

308.0

EPS - normalised (p) - Edison

 

 

1.05

2.47

3.84

5.70

6.53

6.80

7.89

5.91

7.15

8.08

EPS - normalised (p)

 

 

0.88

2.31

3.67

5.53

6.35

6.66

7.75

5.77

7.01

7.94

EPS - statutory (p)

 

 

(0.89)

0.05

2.89

5.13

6.02

6.66

6.68

4.54

6.09

7.24

Dividend per share (p)

0.0

0.5

1.5

2.3

4.3

2.8

2.9

2.9

3.0

3.3

Gross Margin (%)

5.8

7.4

8.3

9.9

10.7

11.0

10.6

9.0

9.8

10.3

EBITDA Margin (%)

5.2

6.7

7.9

9.8

10.6

10.5

10.1

8.1

9.2

9.9

Operating Margin - Edison (%)

3.6

4.9

6.4

8.4

9.3

9.2

8.9

6.8

7.8

8.4

BALANCE SHEET

Fixed Assets

 

 

147.7

145.1

149.3

148.3

154.5

163.0

203.8

217.4

217.8

226.1

Intangible Assets

64.6

61.8

59.2

56.3

54.8

54.7

78.1

87.7

84.9

89.7

Tangible Assets

74.1

76.6

77.4

78.9

81.2

84.0

99.0

102.4

104.5

106.2

Investments

9.0

6.7

12.7

13.1

18.5

24.3

26.7

27.3

28.4

30.2

Current Assets

 

 

72.2

76.3

75.1

107.1

99.2

91.8

127.4

121.7

127.5

129.1

Stocks

5.8

4.8

5.3

7.8

9.6

8.9

6.9

10.6

11.8

13.1

Debtors

60.8

64.6

50.7

66.5

56.4

57.7

76.1

91.6

99.6

104.5

Cash

5.5

6.9

19.0

32.8

33.1

25.2

44.5

19.5

16.2

11.5

Current Liabilities

 

 

(57.9)

(59.7)

(58.2)

(78.7)

(66.1)

(58.6)

(106.4)

(104.7)

(107.3)

(108.5)

Creditors

(52.7)

(59.5)

(58.1)

(78.5)

(65.9)

(58.6)

(87.0)

(98.8)

(101.4)

(104.4)

Short term borrowings

(5.2)

(0.2)

(0.2)

(0.2)

(0.2)

(0.0)

(19.4)

(5.9)

(5.9)

(4.2)

Long Term Liabilities

 

 

(18.5)

(21.1)

(17.9)

(22.5)

(18.7)

(21.2)

(41.2)

(50.2)

(44.3)

(40.1)

Long term borrowings

(0.0)

(0.6)

(0.4)

(0.2)

(0.0)

0.0

(8.8)

(14.9)

(9.0)

(4.8)

Other long term liabilities

(18.5)

(20.5)

(17.5)

(22.3)

(18.6)

(21.2)

(32.4)

(35.3)

(35.3)

(35.3)

Net Assets

 

 

143.4

140.6

148.2

154.2

169.0

175.0

183.7

184.2

193.8

206.6

CASH FLOW

Operating Cash Flow

 

 

2.1

11.4

24.8

27.4

22.9

18.0

28.0

23.1

29.4

33.2

Net Interest

(0.8)

(0.8)

(0.2)

(0.1)

(0.2)

(0.4)

(0.6)

(0.9)

(1.2)

(1.2)

Tax

0.4

(1.0)

(0.9)

(2.4)

(3.9)

(3.4)

(6.0)

(2.4)

(7.2)

(4.9)

Capex

(1.5)

(1.3)

(4.3)

(5.3)

(5.4)

(6.3)

(6.2)

(6.9)

(7.3)

(7.3)

Acquisitions/disposals

(3.5)

(1.7)

(4.1)

(0.4)

(5.5)

(4.2)

(13.4)

(20.0)

(0.5)

(7.5)

Financing

44.8

0

0

0

0

1.7

0

0

0

0

Dividends

0.0

0.0

(3.0)

(5.1)

(7.5)

(13.4)

(8.9)

(8.9)

(9.1)

(9.5)

Net Cash Flow

41.5

6.7

12.4

14.0

0.4

(8.0)

(7.0)

(16.0)

4.2

2.9

Opening net debt/(cash)

 

 

41.2

(0.3)

(6.1)

(18.4)

(32.4)

(32.9)

(25.2)

(16.4)

1.3

(1.3)

Finance lease - cash

(0.2)

(0.3)

(0.2)

(0.2)

(0.2)

(0.2)

(1.8)

(1.6)

(1.6)

(1.6)

Other

0.2

(0.6)

0.2

0

0.2

0

0

(0)

(0)

(0)

Closing net debt/(cash)

 

 

(0.3)

(6.1)

(18.4)

(32.4)

(32.9)

(25.2)

(16.4)

1.3

(1.3)

(2.5)

IFRS16 leases

11.4

10.6

10.6

10.6

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Severfield and prepared and issued by Edison, in consideration of a fee payable by Severfield. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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United Kingdom

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1185 Avenue of the Americas

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United States of America

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NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Severfield and prepared and issued by Edison, in consideration of a fee payable by Severfield. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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