Severfield — Improved Q2 trading pattern continues

Severfield (LSE: SFR)

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Research: Industrials

Severfield — Improved Q2 trading pattern continues

Site activity regaining pre-lockdown levels and a maintained UK/Europe order book were the key operational messages in Severfield’s AGM update. Market conditions mean that recovery within the Indian JV has been more constrained. The payment of an unchanged 1.8p final dividend for FY20 (as announced on 30 July) was approved and management stated that it is cautiously optimistic regarding the FY21 outlook. We plan to reinstate estimates with the H121 results expected in November.

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Industrials

Severfield

Improved Q2 trading pattern continues

AGM update

Construction & materials

4 September 2020

Price

55.2p

Market cap

£169m

Net cash (£m) at end March 2020

16.4

Shares in issue

307.6m

Free float

100%

Code

SFR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.8)

(21.1)

(11.0)

Rel (local)

(2.9)

(15.1)

8.1

52-week high/low

93.0p

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

H121 results

24 November 2020

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Severfield is a research client of Edison Investment Research Limited

Site activity regaining pre-lockdown levels and a maintained UK/Europe order book were the key operational messages in Severfield’s AGM update. Market conditions mean that recovery within the Indian JV has been more constrained. The payment of an unchanged 1.8p final dividend for FY20 (as announced on 30 July) was approved and management stated that it is cautiously optimistic regarding the FY21 outlook. We plan to reinstate estimates with the H121 results expected in November.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield**
(%)

03/18**

274.2

24.1

6.5

4.3

8.5

7.8

03/19

274.9

25.1

6.8

2.8

8.1

5.1

03/20

327.4

29.1

7.9

2.9

7.0

5.3

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

UK operations busy and winning new business

Severfield’s AGM update noted that UK activity levels returned to pre-COVID-19 lockdown levels during Q2. Moreover, the UK and Europe order book is showing stability at £270m; this indicates that new business has been picked up during the period and it appears to have been more UK-centric – and spread rather than any single major win – though European orders on hand are still significant. Prospects for further new projects remain encouraging. The impacts on profitability of the initial lockdown, especially Q1 effects, are yet to be revealed. At the margin, sporadic price competition could temper project returns.

Tougher local conditions in India

The Indian JV has operated under more restrictive lockdown conditions than in the UK and is yet to return to pre-lockdown levels. The order book position has reduced from £110m (1 June) to £94m (1 September); in the absence of new business wins, this suggests a recent revenue run rate of £5m+/month – obviously higher if new wins have occurred – versus c £9m in FY20. Again, the financial impact is not clear yet but a larger sub-contract supply chain means that the JV retains flexible cost base options despite increasing capacity in the last financial year. More commercial work is identified in the pipeline and may feed into the order book in due course.

Cash-generative model

Severfield traditionally reports only end H1/FY financial positions and, hence, a net funds update was not provided with the AGM. An unchanged final dividend payment (c £5.5m) and expected Harry Peers deferred consideration (£6m+) will eat into the £16.4m net cash position at the end of FY20. That said, management remains confident in the company’s cash-generative model and repayment of RCF funds (drawn down as cover at the prior year end) during H1 indicates greater clarity and comfort in the cash flow outlook now compared to the initial phase of lockdown at the beginning of the financial year.

Exhibit 1: Financial summary

£m

2014

2015

2016

2017

2018

2019

2020

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

231.3

201.5

239.4

262.2

274.2

274.9

327.4

Cost of Sales

(217.8)

(186.7)

(219.6)

(236.3)

(244.9)

(244.6)

(292.6)

Gross Profit

13.5

14.9

19.8

25.9

29.3

30.3

34.7

EBITDA

 

 

12.0

13.6

18.9

25.7

29.1

29.0

33.2

Operating Profit - Edison adjusted

 

8.4

10.0

15.2

22.1

25.4

25.3

29.3

SBP

(0.2)

(0.5)

(1.1)

(2.0)

(2.0)

(1.6)

(1.8)

Pension Net Finance Costs

(0.5)

(0.5)

(0.5)

(0.5)

(0.6)

(0.4)

(0.4)

Operating Profit - company norm

 

7.6

9.0

13.7

19.6

22.9

23.3

27.0

Net Interest

(0.6)

(0.5)

(0.2)

(0.2)

(0.2)

(0.2)

(0.7)

Associates

(3.0)

(0.2)

(0.2)

0.5

0.9

1.7

2.4

Intangible Amortisation

(2.7)

(2.6)

(2.6)

(2.6)

(1.3)

0.0

(1.4)

Exceptionals

(5.3)

(5.9)

(0.9)

0.8

0.0

0.0

(1.4)

Profit Before Tax (norm) - Edison

 

4.5

8.8

13.7

20.3

24.1

25.1

29.1

Profit Before Tax (norm)

 

 

4.0

8.3

13.2

19.8

23.5

24.7

28.6

Profit Before Tax (statutory)

 

 

(4.1)

(0.2)

9.6

18.1

22.2

24.7

25.8

Tax

1.4

0.3

(1.0)

(2.7)

(4.1)

(4.5)

(5.4)

Profit After Tax (norm)

3.1

7.4

11.4

17.0

19.6

20.6

24.1

Profit After Tax (statutory)

(2.6)

0.1

8.6

15.3

18.0

20.2

20.4

Average Number of Shares Outstanding (m)

295.8

297.5

297.5

298.9

299.7

303.1

305.4

EPS - normalised (p) - Edison

 

 

1.05

2.47

3.84

5.70

6.53

6.80

7.89

EPS - normalised (p)

 

 

0.88

2.31

3.67

5.53

6.35

6.66

7.75

EPS - statutory (p)

 

 

(0.89)

0.05

2.89

5.13

6.02

6.66

6.68

Dividend per share (p)

0.0

0.5

1.5

2.3

4.3

2.8

1.1

Gross Margin (%)

5.8

7.4

8.3

9.9

10.7

11.0

10.6

EBITDA Margin (%)

5.2

6.7

7.9

9.8

10.6

10.5

10.1

Operating Margin - Edison (%)

3.6

4.9

6.4

8.4

9.3

9.2

8.9

BALANCE SHEET

Fixed Assets

 

 

147.7

145.1

149.3

148.3

154.5

163.0

203.8

Intangible Assets

64.6

61.8

59.2

56.3

54.8

54.7

78.1

Tangible Assets

74.1

76.6

77.4

78.9

81.2

84.0

99.0

Investments

9.0

6.7

12.7

13.1

18.5

24.3

26.7

Current Assets

 

 

72.2

76.3

75.1

107.1

99.2

91.8

127.4

Stocks

5.8

4.8

5.3

7.8

9.6

8.9

6.9

Debtors

60.8

64.6

50.7

66.5

56.4

57.7

76.1

Cash

5.5

6.9

19.0

32.8

33.1

25.2

44.5

Current Liabilities

 

 

(57.9)

(59.7)

(58.2)

(78.7)

(66.1)

(58.6)

(106.4)

Creditors

(52.7)

(59.5)

(58.1)

(78.5)

(65.9)

(58.6)

(87.0)

Short term borrowings

(5.2)

(0.2)

(0.2)

(0.2)

(0.2)

(0.0)

(19.4)

Long Term Liabilities

 

 

(18.5)

(21.1)

(17.9)

(22.5)

(18.7)

(21.2)

(41.2)

Long term borrowings

(0.0)

(0.6)

(0.4)

(0.2)

(0.0)

0.0

(8.8)

Other long term liabilities

(18.5)

(20.5)

(17.5)

(22.3)

(18.6)

(21.2)

(32.4)

Net Assets

 

 

143.4

140.6

148.2

154.2

169.0

175.0

183.7

CASH FLOW

Operating Cash Flow

 

 

2.1

11.4

24.8

27.4

22.9

18.0

28.0

Net Interest

(0.8)

(0.8)

(0.2)

(0.1)

(0.2)

(0.4)

(0.6)

Tax

0.4

(1.0)

(0.9)

(2.4)

(3.9)

(3.4)

(6.0)

Capex

(1.5)

(1.3)

(4.3)

(5.3)

(5.4)

(6.3)

(6.2)

Acquisitions/disposals

(3.5)

(1.7)

(4.1)

(0.4)

(5.5)

(4.2)

(13.4)

Financing

44.8

0

0

0

0

1.7

0

Dividends

0.0

0.0

(3.0)

(5.1)

(7.5)

(13.4)

(8.9)

Net Cash Flow

41.5

6.7

12.4

14.0

0.4

(8.0)

(7.0)

Opening net debt/(cash)

 

 

41.2

(0.3)

(6.1)

(18.4)

(32.4)

(32.9)

(25.2)

Finance lease - cash

(0.2)

(0.3)

(0.2)

(0.2)

(0.2)

(0.2)

(1.8)

Other

0.2

(0.6)

0.2

0

0.2

0

(0)

Closing net debt/(cash)

 

 

(0.3)

(6.1)

(18.4)

(32.4)

(32.9)

(25.2)

(16.4)

IFRS 16 leases

11.4

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 2020 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

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

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 2020 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

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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