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Currency in GBP
Last close As at 24/03/2023
GBP0.62
▲ 1.80 (3.00%)
Market capitalisation
GBP191m
Research: Industrials
The strong interims confirmed Severfield’s robust performance in the current inflationary environment. The company is benefiting from solid demand across a range of sectors, which is reflected in the elevated UK order book (£464m versus the 2016–21 average of £266m). In India, the joint venture (JV) is growing rapidly and capacity is to be expanded to cater for additional demand. We believe the quality of the business and the anticipated growth is not reflected in the FY23e P/E rating of c 7.5x, which is comfortably below the long-term average of 10.4x.
Severfield |
Constructing a robust future at a low rating |
Interim results update |
Construction and materials |
12 December 2022 |
Share price performance
Business description
Next events
Analyst
Severfield is a research client of Edison Investment Research Limited |
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The strong interims confirmed Severfield’s robust performance in the current inflationary environment. The company is benefiting from solid demand across a range of sectors, which is reflected in the elevated UK order book (£464m versus the 2016–21 average of £266m). In India, the joint venture (JV) is growing rapidly and capacity is to be expanded to cater for additional demand. We believe the quality of the business and the anticipated growth is not reflected in the FY23e P/E rating of c 7.5x, which is comfortably below the long-term average of 10.4x.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/21 |
363.3 |
24.3 |
6.4 |
2.9 |
9.7 |
4.7 |
03/22 |
403.6 |
27.1 |
7.2 |
3.1 |
8.7 |
5.0 |
03/23e |
490.3 |
31.2 |
8.3 |
3.3 |
7.5 |
5.3 |
03/24e |
500.1 |
33.6 |
8.9 |
3.6 |
7.0 |
5.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Interims boosted by volume growth and inflation
Revenue increased by 21% to £234.9m in H123 (versus H122). Of the £39.0m increase, higher steel prices accounted for c £23m. Underlying operating profit increased by 19%, or £1.9m, to £12.1m as demand was robust and the company managed the cost base well. The contribution from JVs and associates increased from £0.6m to £1.0m. H123 diluted underlying EPS increased from 2.4p in H122 to 2.8p and Severfield declared an interim dividend of 1.3p, up 8%. Net debt fell from £18.4m at end March to £15.8m and is expected to decline further by the end of the financial year.
Severfield remains active across the market
Within the new divisional reporting structure, activity was robust. In Commercial and Industrial, Severfield continued to work on numerous projects, including the Co-op Live Arena in Manchester and Google’s new headquarters at Kings Cross. In Nuclear and Industrial, work continued on various HS2 bridging projects and at Hinkley Point and Sellafield. In Products and Processing, a number of initiatives are showing exciting potential. Also worth noting is that the UK government retained all of its major infrastructure projects in the recent Autumn Statement, which may have been at risk given the state of government financing.
Valuation: 7.5x P/E well below the long-term average
The outlook for Severfield remains encouraging. The UK order book stands at £464m (£486m in June) with a solid pipeline behind it, and in India the JV order book stands at £143m (£158m in June), again with a good tailwind of prospects to come. Severfield is managing inflationary pressures well and, given the workload visibility, expects to deliver on its previous FY23 expectations. Our profit estimates are unchanged. Severfield trades on a FY23e P/E ratio of 7.5x which is low and compares well with the long-term average ratio of 10.4x over the last five years. The 5%+ yield is an added attraction.
Solid growth opportunities at a low valuation
The interims highlighted that despite inflationary headwinds hitting the sector, Severfield was successfully able to grow both the top line and the profit line of the business, while maintaining the operating margin. It was also able to demonstrate a robust and increasingly diverse order book that means the company is set up well for the foreseeable future. We believe that the strong order book and positive outlook is not reflected in the depressed FY23e 7.5x P/E rating of the shares. Historically, Severfield has traded on an average P/E of 10.4x over the last five years, which gives some indication of the potential upside.
Interims highlight growth and margin maintenance
Revenue increased by 20% in the period to £234.9m. Of the £39.0m increase, higher steel prices accounted for c £23m. In the Commercial and Industrial division, revenue was driven by some key projects including the Co-op Live Arena in Manchester, Google’s new headquarters at Kings Cross and a large industrial facility in the Republic of Ireland, which is now largely complete. Other contributing projects included the new Everton football club stadium, Pinewood Studios in Shepperton, the ExCel Arena in London and a number of office developments despite post COVID-19 working trends.
In Nuclear and Infrastructure, Severfield worked on a variety of HS2 bridge packages for several consortia, and a number of road bridges on the M1, the A46 and junction 6 of the M42. In Nuclear, Severfield was active at Hinkley Point and continues to work on several large projects at Sellerfield.
H123 underlying operating profit (before JVs and associates) increased 19%, or £1.9m, to £12.1m due to robust demand and the company’s management of the cost base. The contribution from JVs and associates increased from £0.6m to £1.0m with the Indian JV, JSSL doubling its contribution to £0.6m and Construction Metal Forming growing from £0.3m to £0.4m. Diluted underlying EPS increased from 2.4p in H122 to 2.8p in H123 and the company declared an interim dividend of 1.3p.
Exhibit 1: Interims results summary
H122 |
H123 |
y-o-y chg |
||
Total revenues |
195.9 |
234.9 |
19.9% |
|
Underlying operating profit (U/L, and excluding JVs and associates)) |
10.2 |
12.1 |
19.1% |
|
Underlying operating margin |
5.2% |
5.2% |
- |
|
JVs and associates |
0.6 |
1.0 |
78.8% |
|
Operating profit (U/L and including JVs and associates |
10.8 |
13.2 |
28.6% |
|
Underlying profit before tax |
10.3 |
12.1 |
17.5% |
|
EPS - continuing, pre-exceptional (p) |
2.4 |
2.8 |
16.5% |
|
Dividend per share (p) |
1.2 |
1.3 |
8.3% |
|
Underlying net cash/(debt) |
(6.7) |
(15.8) |
137.0% |
|
Source: Severfield
Order book has materially expanded and diversified
Over the last four years, Severfield’s UK and Europe order book has grown materially and diversified. Looking at Exhibit 2 it is possible to see these two themes very clearly. Firstly, the absolute size of the book has doubled, with the current order book standing at £464m versus just £230m in 2018. We understand that c £70m of the increase relates directly to steel price increases that Severfield passes through. However, even splitting this inflation out of the numbers, the order book has grown more than 70% in four years, a compound growth rate of 14% pa.
Secondly, the diversification in the order book has improved materially. In 2018, commercial offices accounted for 60% of the order book and typically have an c 18-month construction cycle. This section of the order book is still of a similar size in absolute terms, but is now less than one-third of the total order book. By contrast, four other sectors each account for 15–17% of the order book and several of these, particularly in nuclear and transport, will be contracts that have been won that are part of much longer-term projects, such as nuclear de-commissioning and HS2.
There are other aspects that give cause for optimism. In the recent Autumn Statement, the UK government chose not to cut or cancel any infrastructure projects despite pressure to do so. This included maintaining HS2. The government has other initiatives including the £850m Automotive Transformation Fund, which is expected to support the construction of battery gigafactories and zero-carbon vehicle production facilities. These initiatives, and other growth industries such as film and TV, are likely to require built infrastructure, which bodes well for the future of Severfield.
|
Exhibit 2: Diversified UK and Europe order book (£m) |
|
|
Source: Severfield and Edison Investment Research |
Valuation sits close to historic low
On our FY23e EPS of 8.3p, Severfield is trading on a forward P/E of 7.5x, which is close to the low it hit during the pandemic and very close to the low of c 7.0x it hit earlier this summer when inflationary and recessionary fears were at their greatest. While we accept that these are real fears, we would argue that the policy response from the UK government has been supportive of investment in the built space and that Severfield’s order book, coupled with the long-term nature of many of its projects, means that the outlook for the company is much more positive that the current P/E rating suggests.
It is also worth noting that the balance sheet is arguably under-stretched with a net debt/EBITDA ratio of c 0.4x and given the cash generative nature of the business, it could be close to debt-free by March 2025, which is just over two years from now, despite paying c £10m pa to shareholders in dividends. The dividend is growing and yields over 5% at the current price, which is an additional comfort for shareholders.
|
Exhibit 3: Severfield – forward P/E ratio, last five years |
|
|
Source: Refinitiv |
Exhibit 4: Financial summary
£'m |
2020 |
2021 |
2022 |
2023e |
2024e |
2025e |
||
31-March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||||
Revenue |
|
|
327.4 |
363.3 |
403.6 |
490.3 |
500.1 |
520.1 |
EBITDA |
|
|
33.3 |
29.6 |
33.4 |
38.5 |
40.7 |
41.9 |
Normalised operating profit |
|
|
29.3 |
25.1 |
28.2 |
33.0 |
34.9 |
35.9 |
Operating profit (U/L incl JV and associates) |
|
|
29.3 |
25.1 |
28.2 |
33.0 |
34.9 |
35.9 |
Amortisation of acquired intangibles |
(1.4) |
(2.8) |
(5.2) |
(5.2) |
(5.2) |
(5.2) |
||
Exceptionals |
(1.4) |
(0.4) |
(0.7) |
0.0 |
0.0 |
0.0 |
||
Share-based payments |
(0.3) |
0.6 |
1.0 |
1.0 |
1.0 |
1.0 |
||
Other |
0.5 |
0.4 |
0.4 |
0.4 |
0.4 |
0.4 |
||
Reported operating profit |
26.7 |
22.9 |
23.8 |
29.2 |
31.1 |
32.1 |
||
Net Interest |
(0.7) |
(0.8) |
(1.1) |
(1.8) |
(1.3) |
(0.7) |
||
Exceptionals |
(0.5) |
(0.4) |
(0.7) |
(0.4) |
(0.4) |
(0.4) |
||
Profit Before Tax (norm) |
|
|
28.6 |
24.3 |
27.1 |
31.2 |
33.6 |
35.2 |
Profit before tax (U/L, Company basis) |
|
28.6 |
24.3 |
27.1 |
31.2 |
33.6 |
35.2 |
|
Profit Before Tax (reported) |
|
|
25.8 |
21.1 |
21.0 |
26.0 |
28.4 |
30.0 |
Reported tax |
(5.4) |
(3.8) |
(5.4) |
(5.5) |
(6.0) |
(6.3) |
||
Net income (normalised) |
23.2 |
20.5 |
21.7 |
25.7 |
27.7 |
28.9 |
||
Net income (reported) |
20.4 |
17.3 |
15.6 |
20.5 |
22.5 |
23.7 |
||
Basic average number of shares outstanding (m) |
305 |
307 |
309 |
309 |
310 |
310 |
||
EPS - basic reported (p) |
|
|
6.68 |
5.63 |
5.05 |
6.64 |
7.26 |
7.66 |
EPS - basic normalised (p) |
|
|
7.60 |
6.68 |
7.03 |
8.32 |
8.94 |
9.34 |
EPS - diluted normalised (p) |
|
|
7.56 |
6.68 |
7.00 |
8.29 |
8.90 |
9.30 |
EPS - (U/L, diluted, Company basis) |
|
|
7.70 |
6.43 |
7.19 |
8.29 |
8.90 |
9.30 |
Dividend (p) |
2.90 |
2.90 |
3.10 |
3.30 |
3.60 |
3.70 |
||
Revenue growth (%) |
19.1 |
11.0 |
11.1 |
21.5 |
2.0 |
0.0 |
||
EBITDA Margin (%) |
10.2 |
8.1 |
8.3 |
7.9 |
8.1 |
8.1 |
||
Normalised Operating Margin |
9.0 |
6.9 |
7.0 |
6.7 |
7.0 |
6.9 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
203.8 |
230.1 |
230.1 |
242.1 |
245.2 |
249.6 |
Intangible Assets |
78.1 |
95.4 |
92.5 |
92.7 |
92.9 |
93.1 |
||
Tangible Assets |
88.9 |
91.7 |
91.4 |
104.9 |
108.7 |
112.7 |
||
Investments & other |
36.8 |
43.0 |
46.1 |
44.4 |
43.6 |
43.8 |
||
Current Assets |
|
|
127.4 |
107.7 |
140.7 |
143.2 |
147.8 |
154.6 |
Stocks |
6.9 |
10.2 |
18.0 |
12.0 |
12.5 |
13.0 |
||
Debtors |
74.6 |
67.8 |
117.9 |
126.4 |
130.4 |
136.8 |
||
Cash & cash equivalents |
44.3 |
25.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
1.6 |
4.6 |
4.8 |
4.8 |
4.8 |
4.8 |
||
Current Liabilities |
|
|
(106.4) |
(85.4) |
(123.3) |
(132.3) |
(134.2) |
(139.1) |
Creditors |
(84.4) |
(77.8) |
(111.7) |
(120.6) |
(122.5) |
(127.4) |
||
Tax and social security |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Short term borrowings |
(19.4) |
(5.9) |
(5.9) |
(5.9) |
(5.9) |
(5.9) |
||
Other |
(2.6) |
(1.7) |
(5.7) |
(5.7) |
(5.7) |
(5.7) |
||
Long Term Liabilities |
|
|
(41.2) |
(61.4) |
(43.5) |
(36.8) |
(28.6) |
(20.7) |
Long term borrowings |
(8.8) |
(14.9) |
(9.0) |
(4.3) |
1.9 |
7.9 |
||
Other long term liabilities |
(32.4) |
(46.5) |
(34.5) |
(32.5) |
(30.5) |
(28.5) |
||
Net Assets |
|
|
183.7 |
190.9 |
204.0 |
216.2 |
230.2 |
244.5 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
183.7 |
190.9 |
204.0 |
216.2 |
230.2 |
244.5 |
CASH FLOW |
||||||||
Op Cash Flow before WC and tax |
36.3 |
34.0 |
40.5 |
45.0 |
47.2 |
48.4 |
||
Working capital |
(2.2) |
(0.2) |
(34.5) |
6.4 |
(2.7) |
(2.0) |
||
Exceptional & other |
(2.3) |
(3.5) |
(5.4) |
(4.8) |
(4.8) |
(4.8) |
||
Tax |
(6.0) |
(4.6) |
(3.8) |
(7.0) |
(7.7) |
(8.3) |
||
Other |
(3.8) |
(0.2) |
(2.4) |
(3.2) |
(3.8) |
(4.6) |
||
Net operating cash flow |
|
|
22.0 |
25.3 |
(5.7) |
36.4 |
28.2 |
28.8 |
Capex |
(6.2) |
(6.5) |
(5.0) |
(7.7) |
(8.2) |
(8.7) |
||
Acquisitions/disposals |
(13.4) |
(19.9) |
(0.5) |
(11.5) |
(1.5) |
(1.5) |
||
Net interest |
(0.6) |
(0.7) |
(1.1) |
(1.1) |
(0.6) |
0.0 |
||
Equity financing |
0.1 |
0.4 |
0.9 |
1.0 |
1.0 |
1.0 |
||
Dividends |
(8.9) |
(8.9) |
(9.2) |
(9.9) |
(10.2) |
(11.1) |
||
Other |
(1.8) |
(1.8) |
(2.2) |
(2.5) |
(2.5) |
(2.5) |
||
Net Cash Flow |
(8.8) |
(12.0) |
(22.8) |
4.7 |
6.2 |
6.0 |
||
Opening net debt/(cash) |
|
|
(25.2) |
(16.4) |
(4.4) |
18.4 |
13.7 |
7.6 |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
(16.4) |
(4.4) |
18.4 |
13.7 |
7.6 |
1.6 |
Source: Company accounts, Edison Investment Research
|
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Research: Financials
Record is continuing to make good progress with its strategy of developing new capabilities and products to augment its core currency management services. This holds out the prospect of significantly higher and more diversified revenue and profit by FY25. In the meantime, existing currency strategies have performed well against a more volatile market background, which also creates a favourable background for conversations with potential clients for well-established hedging services.
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