Severfield — FY24 expectations unchanged, order book robust

Severfield (LSE: SFR)

Last close As at 20/04/2024

GBP0.67

2.80 (4.35%)

Market capitalisation

GBP209m

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Research: Industrials

Severfield — FY24 expectations unchanged, order book robust

Severfield’s H124 results highlighted profit growth despite declining revenue, and management continues to expect full-year results to be in line with previous guidance. The total order book has also remained at elevated levels despite the loss of a large studio contract, highlighting the quality of future work in the UK and Europe, and that it is a key indicator of future earnings visibility. The FY24e P/E rating of 7.0x is comfortably below the long-term average of c 10x, implying some risk is discounted in the rating. The stock yields nearly 6%, which is an added attraction.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Severfield

FY24 expectations unchanged, order book robust

H124 results

Construction and materials

14 December 2023

Price

61p

Market cap

£189m

Estimated net cash (£m) at
30 September 2023

0.4

Shares in issue

309.5m

Free float

100%

Code

SFR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.1)

1.7

(1.0)

Rel (local)

(6.0)

1.3

(1.1)

52-week high/low

75.0p

57.4p

Business description

Severfield is a market-leading UK structural steelwork fabricator operating across a broad range of market sectors, now with a Dutch subsidiary. An Indian facility undertakes structural steelwork projects for the local market in a joint venture with India’s largest steel producer, JSW Steel.

Next events

Year-end trading update

March 2024

Analyst

Andy Murphy

+44 (0)20 3077 5700

Severfield is a research client of Edison Investment Research Limited

Severfield’s H124 results highlighted profit growth despite declining revenue, and management continues to expect full-year results to be in line with previous guidance. The total order book has also remained at elevated levels despite the loss of a large studio contract, highlighting the quality of future work in the UK and Europe, and that it is a key indicator of future earnings visibility. The FY24e P/E rating of 7.0x is comfortably below the long-term average of c 10x, implying some risk is discounted in the rating. The stock yields nearly 6%, which is an added attraction.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/22

403.6

27.1

7.2

3.1

8.5

5.1

03/23

491.8

32.5

8.4

3.4

7.3

5.6

03/24e

482.9

35.2

8.7

3.6

7.0

5.9

03/25e

550.5

37.5

9.3

3.8

6.6

6.2

Note: *PBT and EPS are underlying, diluted, company basis, excluding amortisation of acquired intangibles, and exceptional items .

Profit growth and cash generation are strong

H124 revenue declined by 8% to £215.3m, but underlying operating profit rose £2.7m (22%) to £14.8m, mainly due to a c £2m contribution from the core division that was made up of £1.5m from M&A and £0.5m from contract execution improvements. Underlying PBT increased 17% to £14.2m as financing costs rose, reflecting higher average debt levels year-on-year, and underlying diluted EPS increased 10% to 3.1p. The interim dividend increased 8% to 1.3p, reflecting management’s confidence in the future earnings of the company. Severfield ended the period with net cash of £0.4m, which included a £20m advance payment.

Order book strength offers outlook confidence

Over the last five years, Severfield’s UK and Europe order book has grown materially from £230m in 2018 to £482m at 1 November. It has also considerably diversified over that period, reducing risk. Severfield’s order book includes significant new work won in recent months such as orders from SeAH Wind, a data centre in Dublin, a commercial office in London, a large contract secured by VSCH, HS2 bridge projects, secondary steel packages at Hinkley Point and work at Sellafield. The outlook remains positive and we expect the order book to remain at elevated levels for the foreseeable future.

Valuation: Material discount to long-term average

Severfield maintains a strong order book and therefore we would argue that the medium-to-long-term outlook for the company remains encouraging. We have maintained our profit estimates for FY24 and FY25, but have reduced forecast revenues, largely due to the lower price of steel, which is viewed as a passthrough cost by the company. Severfield is trading on an FY24e P/E of 7.0x, which compares favourably with the long-term average of c 10x, and the stock yields nearly 6%, which is an added attraction.

Profit growth highlights earnings quality

The interims highlighted that in a period where revenue was in decline management was able to successfully grow profits, implying the achievement of record H1 margins. Severfield is a cash-generative business and ended H124 with net cash, due in part to customer prepayments, but is likely to be ‘undergeared’ at year-end, implying potential for further enhancing M&A activity in the foreseeable future. It continues to demonstrate a robust and increasingly diverse order book, which means the company is well-set for the medium term. We believe that the strong order book and positive outlook are not reflected in the depressed FY24e P/E rating of 7.0x. Historically, Severfield has traded on an average forward P/E of c 10x over the last six years, which gives some indication of the potential upside.

H1 profits grow strongly despite declining revenue

H124 revenue declined by 8% to £215.3m, largely due to lower production activity in the core construction operations (CCO) of c £47m, offset by a revenue contribution of £27.8m from the Voortman acquisition. Underlying operating profit was up £2.7m (22%) to £14.8m, mainly due to a c £2m contribution from CCO that was made up of £1.5m from Voortman and £0.5m from contract execution improvements. Both contributed to the offset of the decline in revenue in the period. The remaining £0.7m was the profit improvement in SPP within the Modular Solutions operation. The contribution from the Indian joint venture (JV) was flat at £0.6m despite a material decline in revenue in the period.

Underlying PBT increased 17% to £14.2m as financing costs rose due to the higher post M&A average debt levels and underlying diluted EPS increased 10% to 3.1p. The interim dividend increased 8% to 1.3p, reflecting management’s confidence in the future earnings of the company. Severfield ended the period with net cash of £0.4m, which included a £15.6m improvement in working capital, which was an underlying improvement of £5.6m, plus a £10m advance payment from a customer, taking the total advance payments to £20m.

Exhibit 1: Interim results summary

£m

H122

H123

y-o-y % chg

H124

y-o-y % chg

Total revenues

195.9

234.9

19.9%

215.3

-8.3%

Operating profit (U/L, and excluding JVs and associates)

10.2

12.1

18.9%

14.8

22.0%

Underlying operating margin

5.2%

5.2%

-

6.9%

-

JVs and associates

0.6

1.0

78.8%

0.8

-23.0%

Operating profit (U/L, and including JVs and associates)

10.8

13.1

22.1%

15.6

18.5%

Profit before tax (post exceptionals and other)

7.9

10.2

28.2%

11.0

8.5%

EPS - continuing, pre-exceptional, diluted, p

2.4

2.8

16.2%

3.1

10.0%

Dividend per share, p

1.2

1.3

8.3%

1.3

0.0%

Underlying net cash/(debt)

(6.7)

(15.8)

137.4%

0.4

-102.6%

Source: Severfield

The revenue generated by the CCO operations accounts for a large majority of the total revenue of the group and declined as mentioned above. The division is made up of two sub-divisions: Commercial and Industrial (C&I) and Nuclear and Infrastructure (N&I). C&I accounted for 80% of divisional revenue in the period and declined overall by 9% to £166.5m. The principal drivers of the decline were the ‘pause’ in construction at Sunset Studios and generally softer market conditions in the distribution sector. Work continued on Everton FC’s new stadium, the Envision Battery Plant in Sunderland, the LHR 11 data centre and the Excel Arena, among others. Work also began on the SeAH Wind monopile manufacturing facility on Teesside.

The N&I division (20% of CCO revenue) saw a 7% decline in revenue to £41.5m, due to softer market conditions in the infrastructure business, offset by positive timing differences in the nuclear operations. Severfield carried out work on several bridge packages for HS2 contracts, work on the Silvertown Tunnel and at Old Oak Common, also related to HS2 contracts. In the nuclear operations, work was undertaken at Hinkley Point, Sellafield and in Berkshire for the AWE.

The nascent Modular Solutions division saw revenue decline by 7% to £10.7m, but it reported an underlying operating profit for the first time, of £0.1m, versus a loss of £0.6m in the comparative period, reflecting an improved sales mix of higher-margin Severstor and Rotoflo products. Divisional PBT flipped from a £0.1m loss to a £0.2m profit, reflecting a post-tax share of profit in the CMF JV of £0.1m, which itself suffered from some overhead under-recovery. In the division, Severfield made good progress in developing revenues in its Severstor business including activity from the power, rail and oil and gas sectors.

Order book robust with material opportunity

Over the last five years, Severfield’s UK and Europe order book has grown materially and has significantly diversified. Looking at Exhibit 2 it is possible to see these two themes very clearly. Firstly, the absolute size of the book has broadly doubled, with the current order book standing at £482m versus just £230m in 2018. Secondly, the diversification in the order book has improved materially. In 2018, commercial offices accounted for 60% of the order book. This section of the order book has declined in absolute size at the same time as the total order book has grown and it now stands at c 22% of the total. The largest section is now industrial and distribution, which is itself a very diversified grouping.

Severfield’s C&I orderbook stood at £326m at 1 November (1 June: £372m) and included significant new work won in recent months such as orders from SeAH Wind, a large data centre in Dublin, a commercial office in London (334 Oxford Street) and a large Dutch contract secured by VSCH. There remain some large project opportunities in the UK and Europe, which are likely to be supported by the acquisition of VSCH, especially in the zero-carbon field, as well as film and TV and data centres.

The N&I order book grew from £133m in June to £152m at 1 November, driven by wins for HS2 bridge projects, secondary steel packages at Hinkley Point and work at Sellafield. The outlook is promising despite the cancellation of the northern section of the HS2 project (which had never been included in the order book) with potential orders from various parts of the remaining HS2 project, the Northern Powerhouse and various other government-backed power initiatives.

Exhibit 2: Diversified UK and Europe order book (£m)

Source: Severfield and Edison Investment Research

Forward P/E rating discounts potential risk

Although we are maintaining our profit and cash flow estimates, we have reduced our FY24 and FY25 revenue estimates to reflect the lower market price of steel, which is essentially a passthrough cost for the company. In addition to the c £20m steel cost revenue reduction in FY24, we have reduced revenue by a further c £50m to reflect the ‘pause’ in Sunset Studios activity, with a range of smaller contracts accounting for the balance. Management action to contain costs has made up for the lost revenue, hence the maintenance of profit estimates.

Exhibit 3: Revised estimates

£m

FY23

FY24e

FY25e

Actual

Old

New

% chg

Old

New

% chg

Revenue

491.8

566.5

482.9

-14.7%

589.2

550.5

-6.5%

Y-o-y % change

21.9%

15.2%

-1.8%

-

4.1%

14.0%

-

EBITDA - Edison basis

40.4

45.0

45.0

-0.1%

47.5

47.5

0.1%

Y-o-y % change

20.9%

11.4%

11.4%

-

5.6%

5.7%

-

Underlying operating profit

 

35.0

38.2

38.2

0.0%

40.5

40.5

0.1%

Y-o-y % change

23.9%

9.1%

9.3%

-

6.0%

6.1%

-

PBT (Underlying, pre exceptionals)

32.5

35.2

35.2

0.0%

37.5

37.5

0.1%

Y-o-y % change

 

19.8%

8.3%

8.4%

-

6.5%

6.6%

-

EPS - Underlying, diluted, p

8.4

8.9

8.7

-1.9%

9.5

9.3

-2.3%

Y-o-y % change

16.7%

6.0%

4.1%

-

6.7%

6.3%

-

DPS, p

3.4

3.6

3.6

0.0%

3.8

3.8

0.0%

Y-o-y % change

9.7%

5.9%

5.9%

-

5.6%

5.6%

-

Net (debt)/cash (pre IFRS 16)

2.7

(30.1)

(30.2

0.2%

(21.7)

(22.0)

1.4%

Y-o-y % change

-114.6%

-1214.0%

-1221.2%

-

-27.9%

-27.0%

-

Source: Edison Investment Research

On our FY24e EPS of 8.7p, Severfield is trading on a forward P/E of 7.0x, which is below the nadir hit during the COVID pandemic and well below the long-term average of c 10x, and suggests that economic weakness is reflected in the valuation. While we accept this is a rational fear, 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 than the current low P/E rating suggests.

Furthermore, Severfield’s balance sheet is arguably under-stretched with an FY24e net debt/EBITDA ratio of c 0.6x and given the cash-generative nature of the business, it could be close to debt-free by March 2027 post the Voortman acquisition, which is just over three years from now, despite paying c £10m pa to shareholders in dividends. The dividend is growing and yields nearly 6% at the current price, which is an additional comfort for shareholders.

Exhibit 4: Severfield – forward P/E ratio, last six years

Source: Refinitiv

Exhibit 5: Financial summary

£'m

2021

2022

2023

2024e

2025e

2026e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

363.3

403.6

491.8

482.9

550.5

561.5

EBITDA

 

 

29.6

33.4

40.4

45.0

47.5

50.2

Normalised operating profit

 

 

25.1

28.2

35.0

38.2

40.5

43.2

Operating profit (U/L, Company basis, inc JVs)

25.1

28.2

35.0

38.2

40.5

43.2

Amortisation of acquired intangibles

(2.8)

(5.2)

(3.3)

(5.2)

(3.3)

(5.2)

Exceptionals

(0.4)

(0.7)

(2.0)

0.0

0.0

0.0

Share-based payments

0.6

1.0

3.4

1.0

1.0

1.0

Other

0.4

0.4

0.6

0.4

0.4

0.4

Reported operating profit

22.9

23.8

33.6

34.4

38.6

39.4

Net Interest

(0.8)

(1.1)

(2.5)

(3.0)

(3.0)

(3.0)

Exceptionals

(0.4)

(0.7)

(0.6)

(0.4)

(0.4)

(0.4)

Profit Before Tax (norm)

 

 

24.3

27.1

32.5

35.2

37.5

40.2

Profit before tax (underlying, company basis)

 

24.3

27.1

32.5

35.2

37.5

40.2

Profit Before Tax (reported)

 

 

21.1

21.0

27.1

30.0

32.3

35.0

Reported tax

(3.8)

(5.4)

(5.5)

(7.5)

(8.1)

(8.7)

Profit After Tax (norm)

20.5

21.7

26.9

27.7

29.4

31.4

Profit After Tax (reported)

17.3

15.6

21.6

22.5

24.2

26.2

Net income (normalised)

20.5

21.7

26.9

27.7

29.4

31.4

Net income (reported)

17.3

15.6

21.6

22.5

24.2

26.2

Basic average number of shares outstanding (m)

307

309

310

310

310

310

EPS - basic reported (p)

 

 

5.63

5.05

6.97

7.27

7.83

8.47

EPS - basic normalised (p)

 

 

6.68

7.03

8.70

8.95

9.51

10.15

EPS - diluted normalised (p)

 

 

6.68

7.00

8.61

8.73

9.28

9.91

EPS - underlying, diluted, company basis (p)

 

 

6.43

7.19

8.39

8.73

9.28

9.91

Dividend (p)

2.90

3.10

3.40

3.60

3.80

4.80

Revenue growth (%)

11.0

11.1

21.9

(-1.8)

14.0

2.0

EBITDA Margin (%)

8.1

8.3

8.2

9.3

8.6

8.9

Normalised Operating Margin (%)

6.9

7.0

7.1

7.9

7.4

7.7

BALANCE SHEET

Fixed Assets

 

 

230.1

230.1

228.4

255.1

259.0

263.9

Intangible Assets

95.4

92.5

89.3

89.5

89.7

89.9

Tangible Assets

91.7

91.4

92.1

118.9

121.9

124.9

Investments & other

43.0

46.1

47.0

46.7

47.4

49.1

Current Assets

 

 

107.7

140.7

136.6

173.7

192.6

196.1

Stocks

10.2

18.0

13.2

14.5

16.5

16.8

Debtors

67.8

117.9

109.7

145.6

162.4

165.6

Cash & cash equivalents

25.0

0.0

11.3

11.3

11.3

11.3

Other

4.6

4.8

2.3

2.3

2.3

2.3

Current Liabilities

 

 

(85.4)

(123.3)

(109.0)

(129.0)

(147.8)

(150.6)

Creditors

(77.8)

(111.7)

(102.7)

(122.7)

(141.5)

(144.3)

Short term borrowings

(5.9)

(5.9)

(4.2)

(4.2)

(4.2)

(4.2)

Other

(1.7)

(5.7)

(2.2)

(2.2)

(2.2)

(2.2)

Long Term Liabilities

 

 

(61.4)

(43.5)

(38.3)

(69.1)

(59.0)

(49.1)

Long term borrowings

(14.9)

(9.0)

(4.8)

(37.7)

(29.5)

(21.6)

Other long term liabilities

(46.5)

(34.5)

(33.5)

(31.5)

(29.5)

(27.5)

Net Assets

 

 

190.9

204.0

217.7

230.7

244.8

260.3

Shareholders' equity

 

 

190.9

204.0

217.7

230.7

244.8

260.3

CASH FLOW

Op Cash Flow before WC and tax

34.0

40.5

45.6

51.5

54.0

56.7

Working capital

(0.2)

(34.5)

13.8

(17.2)

(0.0)

(0.7)

Exceptional & other

(3.5)

(5.4)

(4.8)

(4.8)

(4.8)

(4.8)

Tax

(4.6)

(3.8)

(3.5)

(9.3)

(10.1)

(10.7)

Other

(0.2)

(2.4)

(0.8)

(4.3)

(5.1)

(6.1)

Net operating cash flow

 

 

25.3

(5.7)

50.3

15.9

34.0

34.3

Capex

(6.5)

(5.0)

(6.2)

(11.2)

(8.7)

(8.7)

Acquisitions/disposals

(19.9)

(0.5)

(8.5)

(22.6)

(1.5)

(1.5)

Net interest

(0.7)

(1.1)

(2.5)

(3.0)

(3.0)

(3.0)

Equity financing

0.4

0.9

0.0

1.0

1.0

1.0

Dividends

(8.9)

(9.2)

(9.9)

(10.5)

(11.1)

(11.8)

Other

(1.8)

(2.2)

(2.1)

(2.5)

(2.5)

(2.5)

Net Cash Flow

(12.0)

(22.8)

21.1

(32.9)

8.2

7.9

Opening net debt/(cash)

 

 

(16.4)

(4.4)

18.4

(2.7)

30.2

22.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(4.4)

18.4

(2.7)

30.2

22.0

14.2

Source: Company accounts, Edison Investment Research


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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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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