Severfield — Good end-FY19 order book momentum

Severfield (LSE: SFR)

Last close As at 19/07/2024

GBP0.82

−1.00 (−1.20%)

Market capitalisation

GBP252m

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Research: Industrials

Severfield — Good end-FY19 order book momentum

Higher order books in the UK and India are a positive way to end FY19, which concluded in line with previous guidance. UK market conditions appear to be stable while India is continuing to strengthen. Year-end net cash is similar to H1, and slightly below where we had previously expected, but Severfield retains its conservative balance sheet position. Save for the net cash adjustment, our estimates are unchanged; the P/E rating reduces from 11.1x for the trailing year to 10.3x for FY20 with EV/EBITDA equivalents of 6.8x and 5.9x respectively.

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Industrials

Severfield

Good end-FY19 order book momentum

Year-end update

Construction & materials

29 April 2019

Price

76.0p

Market cap

£231m

Net cash (£m) at end March 2019

25

Shares in issue

303.9m

Free float

100%

Code

SFR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.2

6.2

(2.6)

Rel (local)

11.2

(2.2)

(2.3)

52-week high/low

88.2p

64.6p

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 is fully operational.

Next events

FY19 results

19 June

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Severfield is a research client of Edison Investment Research Limited

Higher order books in the UK and India are a positive way to end FY19, which concluded in line with previous guidance. UK market conditions appear to be stable while India is continuing to strengthen. Year-end net cash is similar to H1, and slightly below where we had previously expected, but Severfield retains its conservative balance sheet position. Save for the net cash adjustment, our estimates are unchanged; the P/E rating reduces from 11.1x for the trailing year to 10.3x for FY20 with EV/EBITDA equivalents of 6.8x and 5.9x respectively.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield**
(%)

03/17

262.2

20.3

5.7

2.3

13.3

3.0

03/18**

274.2

24.0

6.5

4.3

11.7

5.7

03/19e

279.2

25.0

6.8

2.8

11.1

3.7

03/20e

285.9

27.3

7.4

3.0

10.3

4.0

Note: *PBT and EPS are normalised, excluding pension net finance costs, intangible amortisation and exceptional items. **FY18 DPS includes a 1.7p special dividend.

Solid UK operational performance and rising orders

The reported year-end order book of £274m is Severfield’s highest in the UK since November 2016, up from £230m at the interim stage. New project work in the Netherlands represents c £10m of this and traction in one of three highlighted new growth areas is to be welcomed. There are fewer large live projects on hand (the Google HQ is the largest) but underlying margins are understood to be stable with operational performance and workflow mix effects balancing out. We believe the order intake pattern will influence the shape of FY20 trading. New business wins have continued into the new financial year and management still sees a stable pipeline of opportunities.

Building order book and capacity in India

At £149m, the Indian JV order book has climbed to another record level (a further material increase from £124m at the H119 stage) reinforcing confidence in capacity expansion. This is underway (adding c 30,000 tonnes or c 50% to fabrication capacity), with completion expected around the end of FY20. Importantly, the commercial mix of the order book is improving (to nearer 50% of the total now) and this should have positive implications for margins as the projects move through to construction completion over the next couple of years.

Valuation: Positive sentiment trigger

Having trading around its year low in March, Severfield’s share price has recovered and regained the levels last seen following its H1 results in November and, as a result, it is up c 4% YTD (versus c 11% for the FTSE All Share Index.) Our post results valuation comments remain valid; the prospective P/E, EV/EBITDA and dividend yields of 10.3x, 5.9x and 4.0% all represent reasonable entry points in our view. We have previously flagged order book development as a potential positive trigger for sentiment and the latest newsflow is certainly providing good grounds for such a response.

Exhibit 1: Financial summary

£m

2011

2012

2013

2014

2015

2016

2017

2018

2019e

2020e

2021e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

12m to Dec

12m to Dec

15m 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

 

 

267.8

256.6

318.3

231.3

201.5

239.4

262.2

274.2

279.2

285.9

292.5

Cost of Sales

(246.9)

(268.8)

(330.9)

(217.8)

(186.7)

(219.6)

(236.3)

(244.9)

(249.0)

(253.2)

(258.9)

Gross Profit

20.9

(12.2)

(12.7)

13.5

14.9

19.8

25.9

29.3

30.3

32.7

33.6

EBITDA

 

 

19.5

(13.6)

(13.6)

12.0

13.6

18.9

25.7

29.0

30.2

32.9

34.1

Operating Profit - Edison

 

 

15.0

(17.7)

(18.6)

8.4

10.0

15.2

22.1

25.4

26.1

28.3

29.0

Net Interest

(1.6)

(1.6)

(2.0)

(0.6)

(0.5)

(0.2)

(0.2)

(0.2)

(0.2)

(0.2)

(0.1)

Associates

(2.5)

0.2

(0.3)

(3.0)

(0.2)

(0.2)

0.5

0.9

1.1

1.2

1.3

SBP

(0.3)

(0.0)

(0.1)

(0.2)

(0.5)

(1.1)

(2.0)

(2.0)

(2.0)

(2.0)

(2.0)

Intangible Amortisation

(2.7)

(2.7)

(3.5)

(2.7)

(2.6)

(2.6)

(2.6)

(1.3)

0.0

0.0

0.0

Pension Net Finance Costs

(0.5)

(0.5)

(0.6)

(0.5)

(0.5)

(0.5)

(0.5)

(0.5)

(0.5)

(0.5)

(0.5)

Exceptionals

(0.6)

(1.0)

(3.8)

(5.3)

(5.9)

(0.9)

0.8

0.0

0.0

0.0

0.0

Profit Before Tax (norm) - Edison

 

10.6

(19.1)

(20.9)

4.5

8.8

13.7

20.3

24.0

25.0

27.3

28.1

Profit Before Tax (norm)

 

 

10.1

(19.6)

(21.5)

4.0

8.3

13.2

19.8

23.5

24.5

26.8

27.6

Profit Before Tax (statutory)

 

 

6.8

(23.3)

(28.9)

(4.1)

(0.2)

9.6

18.1

22.2

24.5

26.8

27.6

Tax

(0.9)

3.9

5.7

1.4

0.3

(1.0)

(2.7)

(4.1)

(4.4)

(4.8)

(5.0)

Profit After Tax (norm)

7.7

(16.2)

(17.9)

3.1

7.4

11.4

17.0

19.5

20.6

22.5

23.2

Profit After Tax (statutory)

5.8

(19.4)

(23.1)

(2.6)

0.1

8.6

15.3

18.0

20.1

22.0

22.7

Average Number of Shares Outstanding (m)

89.3

89.3

89.3

295.8

297.5

297.5

298.9

299.7

301.7

303.5

303.5

EPS - norm (p) - Edison

 

 

4.51

(9.42)

(10.42)

1.05

2.47

3.84

5.70

6.52

6.83

7.40

7.64

EPS - norm (p)

 

 

4.21

(9.72)

(9.45)

0.88

2.31

3.67

5.53

6.35

6.66

7.24

7.47

EPS - statutory (p)

 

 

3.41

(11.33)

(13.49)

(0.89)

0.05

2.89

5.13

6.02

6.66

7.24

7.47

Dividend per share (p)

5.0

1.5

0.8

0.0

0.5

1.5

2.3

4.3

2.8

3.0

3.3

Gross Margin (%)

7.8

-4.8

-4.0

5.8

7.4

8.3

9.9

10.7

10.8

11.4

11.5

EBITDA Margin (%)

7.3

-5.3

-4.3

5.2

6.7

7.9

9.8

10.6

10.8

11.5

11.7

Op. Margin - Edison (%)

5.6

-6.9

-5.8

3.6

4.9

6.4

8.4

9.2

9.3

9.9

9.9

BALANCE SHEET

Fixed Assets

 

 

156.9

155.6

154.9

147.7

145.1

149.3

148.3

154.5

162.6

166.7

170.3

Intangible Assets

72.9

70.4

69.8

64.6

61.8

59.2

56.3

54.8

54.7

54.7

54.7

Tangible Assets

79.6

76.2

76.1

74.1

76.6

77.4

78.9

81.2

83.8

86.2

88.0

Investments

4.4

8.9

8.9

9.0

6.7

12.7

13.1

18.5

24.1

25.8

27.5

Current Assets

 

 

100.5

69.8

80.5

72.2

76.3

75.1

107.1

99.2

101.2

114.0

127.1

Stocks

9.1

7.1

8.2

5.8

4.8

5.3

7.8

9.6

10.8

11.0

11.2

Debtors

89.2

61.2

71.6

60.8

64.6

50.7

66.5

56.4

65.1

67.1

69.2

Cash

2.3

1.4

0.7

5.5

6.9

19.0

32.8

33.1

25.3

35.8

46.7

Current Liabilities

 

 

(103.6)

(97.0)

(112.5)

(57.9)

(59.7)

(58.2)

(78.7)

(66.1)

(66.4)

(67.8)

(69.1)

Creditors

(70.3)

(66.1)

(70.9)

(52.7)

(59.5)

(58.1)

(78.5)

(65.9)

(66.3)

(67.7)

(69.0)

Short term borrowings

(33.3)

(30.9)

(41.7)

(5.2)

(0.2)

(0.2)

(0.2)

(0.2)

(0.1)

(0.1)

(0.1)

Long Term Liabilities

 

 

(21.6)

(21.7)

(20.4)

(18.5)

(21.1)

(17.9)

(22.5)

(18.7)

(18.1)

(18.1)

(18.1)

Long term borrowings

(0.3)

(0.3)

(0.2)

(0.0)

(0.6)

(0.4)

(0.2)

(0.0)

0.0

0.0

0.0

Other long term liabilities

(21.3)

(21.4)

(20.2)

(18.5)

(20.5)

(17.5)

(22.3)

(18.6)

(18.1)

(18.1)

(18.1)

Net Assets

 

 

132.3

106.6

102.4

143.4

140.6

148.2

154.2

169.0

179.4

194.8

210.2

CASH FLOW

Operating Cash Flow

 

 

(5.4)

12.9

3.1

2.1

11.4

24.8

27.4

22.9

20.0

31.1

32.5

Net Interest

(2.0)

(1.3)

(1.7)

(0.8)

(0.8)

(0.2)

(0.1)

(0.2)

(0.1)

(0.1)

(0.1)

Tax

(3.7)

(2.7)

(2.3)

0.4

(1.0)

(0.9)

(2.4)

(3.9)

(4.6)

(4.4)

(4.8)

Capex

(1.5)

(0.2)

(1.4)

(1.5)

(1.3)

(4.3)

(5.3)

(5.4)

(6.7)

(7.0)

(7.0)

Acquisitions/disposals

(0)

(2)

(3.0)

(3.5)

(1.7)

(4.1)

(0.4)

(5.5)

(4.5)

(0.5)

(0.5)

Financing

0

0

0.0

44.8

0

0

0

0

2

0

0

Dividends

(3.6)

(4.5)

(4.5)

0.0

0.0

(3.0)

(5.1)

(7.5)

(13.4)

(8.6)

(9.3)

Net Cash Flow

(16.3)

1.7

(9.7)

41.5

6.7

12.4

14.0

0.4

(7.7)

10.5

10.8

Opening net debt/(cash)

 

 

15.0

31.3

31.3

41.2

(0.3)

(6.1)

(18.4)

(32.4)

(32.9)

(25.2)

(35.7)

HP finance leases

0.0

0.1

0.0

(0.2)

(0.3)

(0.2)

(0.2)

(0.2)

(0.1)

0.0

0.0

Other

(0)

(0)

(0)

0.2

(0.6)

0.2

0

0

0

0

0

Closing net debt/(cash)

 

 

31.3

29.7

41.2

(0.3)

(6.1)

(18.4)

(32.4)

(32.9)

(25.2)

(35.7)

(46.5)

Source: Company, 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 Edison analyst 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.

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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 Edison analyst 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.

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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.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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.

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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 (nor will such persons be able to purchase shares in the placing).

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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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

1,185 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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Cohort — Orders underpinning prospects

As anticipated at the H119 results, order intake for Cohort remained strong through the second half of the year. With the addition of Chess, the backlog at the year end should stand at more than £175m, comfortably a record for the group. It represents c 1.3 years of revenues based on our FY20 expectations and while many of the contracts are multi-year, it does provide increased sales cover for the medium term. Cohort continues to deliver against its growth strategy, appears to be largely insulated from Brexit concerns and still trades on an undemanding P/E multiple.

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