Severfield shares offer a growing order book, a strong cash-laden balance sheet, a low price-to-earnings ratio and a 5% yield, writes Mark Watson-Mitchell.
With markets still being so temperamental it has to make sense to continue to look for a combination of growth and value stocks. One such company that fits my criteria is Severfield (LON:SFR), which is the Thirsk, Yorkshire based group that is the UK’s market leader in the structural steel sector.
With some four sites in the UK and employing around 1,400 people, the group manages every aspect of the fabrication and construction process, from initial scheme designs, to specification and manufacture and up to the eventual product handover to its clients.
It has a total capacity of producing 150,000 tonnes of steel each year, and is currently producing some 90,000 tonnes, which is about 10% of the market output for UK structural steelwork. The company has almost unrivalled expertise in large, complex projects for a wide range of business sectors.
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Its clients are involved in schemes in the following sectors: power and energy; industrial and distribution; commercial offices; transport; stadia and leisure; retail; health and education; and data centres and others. The company, which was established in 1978, is probably working on some 35 major projects nationwide at any one time.
Some of its recent iconic projects have included work on Heathrow Terminal 5, Wimbledon Centre Court, the 2012 Olympic Stadium, the First Direct Arena in Leeds, Birmingham New Street Station, the Emirates Stadium, the Shard, the O2 Arena, and even the Paris Philharmonic Hall, amongst scores of others. Office buildings, hospitals, bridges, schools, and other such landmark Severfield projects cover the country.
Since 2010, the company has also had a joint venture in India, with one of the country’s largest steel companies. Severfield sees the Indian market as being very capable of significant growth as it switches from concrete to steel structures, just at the same time as the Indian economy moves closer to a £3 trillion a year gross domestic product.
Growing at 6% per annum, their GDP could well be up to £10 trillion by 2030. Severfield has suggested that the Indian construction market is worth some £100bn per annum, with the concrete to steel switch slowly but definitely now underway.
The Indian company is now focussing on expanding fast and is looking to treble its in-house capacity from 30,000 tonnes a year. With Severfield’s input and integral participation, the Indian joint venture could well become a very profitable interest, especially as it maintains its strong ‘first mover’ advantage.
Overall, the Severfield group is increasing its order book. It was £256m in June 2018, then up to £295m by June this year. The AGM trading update last week stated that it was now a very healthy £301m, of which £281m is for delivery over the next 12 months.
The orders cover a promising range of projects both here in the UK and in the Republic of Ireland, and also on continental Europe, such as large data centres in Ireland and Finland, a car park at Manchester airport, as well as the new Google headquarters building in Kings Cross in London.
Normally the sales revenue has been built on an equal basis over the two half years; however, the company states that this year it will be more heavily weighted towards the second half with a number of large ongoing contracts expected to deliver their profits between now and the end of March 2020. We will get some further indications when the interims are announced on Tuesday 26 November.
Brokers estimates for the current year suggest that revenue could rise from £275m for the last year to £286m and then up to £293m for the coming year. In the same period of time it should reflect a steady growth in profits, from £25.2m for the end-March 2019 year to £26.5m this year and up to £28.5m next year. Earnings growth for those respective years shows 6.8p for 2019, 7.3p for 2020 and up to 7.7p per share in the year to end-March 2021.
The company pays a good dividend, more than twice covered – 2.80p in 2019, with 3.00p anticipated for this year and 3.25p per share next year. By the way the group’s balance sheet is looking pretty healthy with some £25m cash, together with a £25m revolving credit line, if required.
There are some 303,984,746 shares in issue. Institutional holders include M&G (13.32%), JO Hambro (12.77%), Threadneedle (6.68%), Legal & General (5.59%), Invesco (5.51%), Artemis (5.48%), Unicorn (5.23%), Polar Capital (3.36%), Hargreave Hale (2.78%), Standard Life (2.58%), and Chelverton Asset Management (2.39%).
With its shares trading at just 64p this group is capitalised at only £194.6m – that is far too cheap a valuation as far as I can see. It is totally about growth and its upside potential is very attractive, with its shares trading on a mere 8.7 times current year earnings and yielding an appealing near 5% yield.
My target price by the end of 2020 is 88p, while it is worth noting that brokers Peel Hunt currently have a ‘buy’ rating on the stock with a 100p target.