Severfield — Update 3 May 2016

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 — Update 3 May 2016

Severfield

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Written by

Industrials

Severfield

Set to outperform

Dalton site visit

Construction & materials

3 May 2016

Price

52.25p

Market cap

£155m

Net cash (£m) at end September 2015

12.9

Shares in issue

297.5m

Free float

100%

Code

SFR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.2)

(12.9)

(19.6)

Rel (local)

(9.2)

(13.7)

(12.8)

52-week high/low

73.25p

51.0p

Business description

Severfield is a leading UK structural steelwork fabricator operating across a broad range of market sectors. An Indian facility currently undertakes structural steelwork projects for the local market and is fully operational.

Next event

FY16 results

15 June 2016

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Severfield is a research client of Edison Investment Research Limited

Severfield’s rising UK order book and improving margins set a good tone ahead of FY16 results on 15 June. A recent capital markets event served to reinforce the margin development path that the company is on, with further progress targeted. Little of this appears to be factored into the share price currently and we believe the scope for outperformance is now significant.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

231.3

4.5

1.1

0.0

47.8

N/A

03/15

201.5

8.8

2.5

0.5

20.9

1.0

03/16e

232.1

12.3

3.4

1.0

15.4

1.9

03/17e

244.1

16.2

4.5

1.3

11.6

2.5

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

Investing in sustainable margin improvement

Severfield’s FY16 EBIT margin target of 5-6% (FY13: around zero underlying) has been well flagged and is clearly now seen as a staging post for further progress. In markets that remain competitive, operational efficiency improvements have been emphasized. A site visit demonstrated a more co-ordinated facility management approach, with work packages being allocated to the most efficient fabrication site, balancing respective workflows and developing site flexibility. There has also been investment in fabrication (reducing plate process cycle time with multi-station CNC machinery), supply chain (metal decking JV) and ancillary areas (providing a fleet of site safety equipment, previously bought in). There is more to come; Severfield is upgrading its production flow management software (from a bespoke platform to a StruMIS industry ERP system) across all sites. This connects front-end modelling/ design, fabrication and site execution progress more effectively, links to commercial functions (eg purchasing, accounting) and enhances contract visibility at all levels.

Creating client value to enhance margins

Externally, Severfield provides combined structural and building programme design and value engineering expertise to add value to projects (ie increase efficiency, reduce risk, time and cost). This creates scope to differentiate during project development phases, drives tender success and provides opportunities to negotiate a share of any savings created. Earlier and full engagement with end-clients, main contractors and consultants offers potentially greater gains. Severfield’s industry reputation for advice, engineering and project delivery generates new business and Early Contractor Involvement (ECI) with repeat clients is actively being pursued.

Valuation: Rating compressed, earnings upside

Company newsflow has been positive in our view. This has not been reflected in share price performance and the rating has compressed year to date. The FY17e P/E is now 11.6x and EV/EBITDA 6.5x. Bearing in mind that continuing order book growth would be a trigger to raise estimates, this suggests even greater value. While there may be pipeline slippage caveats, we believe that Severfield’s balance of earnings risk is to the upside.

Exhibit 1: Financial summary

£m

2010

2011

2012

2013

2014

2015

2016e

2017e

2018e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

12m to Dec

12m to Dec

12m to Dec

15m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

12m to Mar

PROFIT & LOSS

Revenue

 

 

266.7

267.8

256.6

318.3

231.3

201.5

232.1

244.1

256.1

Cost of Sales

(242.6)

(246.9)

(268.8)

(330.9)

(217.8)

(186.7)

(213.6)

(221.9)

(230.0)

Gross Profit

24.1

20.9

(12.2)

(12.7)

13.5

14.9

18.5

22.3

26.1

EBITDA

 

 

21.6

19.5

(13.6)

(13.6)

12.0

13.6

17.9

21.7

25.7

Operating Profit - Edison

 

 

17.1

15.0

(17.7)

(18.6)

8.4

10.0

13.7

17.2

20.9

Net Interest

(0.9)

(1.6)

(1.6)

(2.0)

(0.6)

(0.5)

(0.4)

(0.3)

(0.2)

Associates

(0.4)

(2.5)

0.2

(0.3)

(3.0)

(0.2)

(0.2)

0.0

0.0

SBP

(0.0)

(0.3)

(0.0)

(0.1)

(0.2)

(0.5)

(0.8)

(0.8)

(0.8)

Intangible Amortisation

(2.7)

(2.7)

(2.7)

(3.5)

(2.7)

(2.6)

(2.6)

(2.6)

(1.6)

Pension Net Finance Costs

(0.5)

(0.5)

(0.5)

(0.6)

(0.5)

(0.5)

(0.5)

(0.5)

(0.5)

Exceptionals

(1.4)

(0.6)

(1.0)

(3.8)

(5.3)

(5.9)

(0.3)

0.0

0.0

Profit Before Tax (norm) - Edison

 

15.8

10.6

(19.1)

(20.9)

4.5

8.8

12.3

16.2

20.0

Profit Before Tax (norm)

 

 

15.3

10.1

(19.6)

(21.5)

4.0

8.3

11.8

15.7

19.5

Profit Before Tax (FRS 3)

 

 

11.1

6.8

(23.3)

(28.9)

(4.1)

(0.2)

8.9

13.1

17.9

Tax

(3.5)

(0.9)

3.9

5.7

1.4

0.3

(1.8)

(2.8)

(3.4)

Profit After Tax (norm)

11.7

7.7

(16.2)

(17.9)

3.1

7.4

10.2

13.4

16.6

Profit After Tax (FRS 3)

7.6

5.8

(19.4)

(23.1)

(2.6)

0.1

7.1

10.3

14.5

Average Number of Shares Outstanding (m)

89.0

89.3

89.3

89.3

295.8

297.5

297.5

297.5

297.5

EPS - normalised (p) - Edison

 

 

6.82

4.51

(9.42)

(10.42)

1.05

2.47

3.42

4.52

5.57

EPS - normalised (p)

 

 

6.51

4.21

(9.72)

(9.45)

0.88

2.31

3.25

4.35

5.40

EPS - FRS 3 (p)

 

 

4.47

3.41

(11.33)

(13.49)

(0.89)

0.05

2.38

3.47

4.87

Dividend per share (p)

7.5

5.0

1.5

0.8

0.0

0.5

1.0

1.3

1.6

Gross Margin (%)

9.0

7.8

-4.8

-4.0

5.8

7.4

8.0

9.1

10.2

EBITDA Margin (%)

8.1

7.3

-5.3

-4.3

5.2

6.7

7.7

8.9

10.0

Operating Margin - Edison (%)

6.4

5.6

-6.9

-5.8

3.6

4.9

5.9

7.1

8.2

BALANCE SHEET

Fixed Assets

 

 

165.0

156.9

155.6

154.9

147.7

145.1

145.9

144.1

143.3

Intangible Assets

75.2

72.9

70.4

69.8

64.6

61.8

59.0

56.3

54.7

Tangible Assets

82.9

79.6

76.2

76.1

74.1

76.6

77.2

77.7

77.9

Investments

6.9

4.4

8.9

8.9

9.0

6.7

9.7

10.2

10.7

Current Assets

 

 

88.1

100.5

69.8

80.5

72.2

76.3

83.4

96.0

110.7

Stocks

12.6

9.1

7.1

8.2

5.8

4.8

5.5

5.7

5.9

Debtors

71.9

89.2

61.2

71.6

60.8

64.6

68.1

72.1

76.0

Cash

3.6

2.3

1.4

0.7

5.5

6.9

9.8

18.3

28.8

Current Liabilities

 

 

(99.8)

(103.6)

(97.0)

(112.5)

(57.9)

(59.7)

(62.6)

(65.6)

(68.2)

Creditors

(81.2)

(70.3)

(66.1)

(70.9)

(52.7)

(59.5)

(62.6)

(65.6)

(68.2)

Short term borrowings

(18.6)

(33.3)

(30.9)

(41.7)

(5.2)

(0.2)

0.0

0.0

0.0

Long Term Liabilities

 

 

(22.3)

(21.6)

(21.7)

(20.4)

(18.5)

(21.1)

(18.3)

(18.3)

(18.3)

Long term borrowings

0.0

(0.3)

(0.3)

(0.2)

(0.0)

(0.6)

(0.6)

(0.6)

(0.6)

Other long term liabilities

(22.3)

(21.3)

(21.4)

(20.2)

(18.5)

(20.5)

(17.8)

(17.8)

(17.8)

Net Assets

 

 

130.9

132.3

106.6

102.4

143.4

140.6

148.3

156.2

167.5

CASH FLOW

Operating Cash Flow

 

 

(5.8)

(5.4)

12.9

3.1

2.1

11.4

16.1

19.2

23.0

Net Interest

(0.8)

(2.0)

(1.3)

(1.7)

(0.8)

(0.8)

(0.4)

(0.3)

(0.2)

Tax

(5.4)

(3.7)

(2.7)

(2.3)

0.4

(1.0)

(1.1)

(1.8)

(2.8)

Capex

(2.8)

(1.5)

(0.2)

(1.4)

(1.5)

(1.3)

(4.5)

(5.0)

(5.0)

Acquisitions/disposals

(2.9)

(0)

(2)

(3.0)

(3.5)

(1.7)

(4.0)

(0.5)

(0.5)

Financing

0

0

0

0.0

44.8

0

0

0

0

Dividends

(8.9)

(3.6)

(4.5)

(4.5)

0.0

0.0

(3.0)

(3.1)

(4.0)

Net Cash Flow

(26.6)

(16.3)

1.7

(9.7)

41.5

6.7

3.1

8.5

10.5

Opening net debt/(cash)

 

 

(11.5)

15.0

31.3

31.3

41.2

(0.3)

(6.1)

(9.2)

(17.7)

HP finance leases initiated

0

0.0

0.1

0.0

(0.2)

(0.3)

(0.1)

0.0

0.0

Other

0

(0)

(0)

(0)

0.2

(0.6)

0.1

0

0

Closing net debt/(cash)

 

 

15.0

31.3

29.7

41.2

(0.3)

(6.1)

(9.2)

(17.7)

(28.2)

Source: Company accounts, Edison Investment Research

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Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Severfield and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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United Kingdom

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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