Re-rating looks to be on the cards at Severfield

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4 mins. to read
Re-rating looks to be on the cards at Severfield

Interim results due within days should reinstate profit guidance at Severfield and see the shares of this structural steel group re-rated upwards.

Based in Thirsk, North Yorkshire, this company is the UK’s largest structural steel construction specialist. Due to the Covid-19 hassles, it sensibly suspended giving the City any guidance on its profitability.

But that could change next Tuesday when the group announces its interim results to end-September. 

We have already had quite a positive statement from Severfield (LON:SFR) about its trading and its order book – that was at the beginning of September when holding its AGM.

At that time the company declared that, “Despite the current ongoing market uncertainty, the strength of our order book, our encouraging pipeline of opportunities, our strong balance sheet position, our expertise in managing complex projects and our long-standing client relationships enable us to feel cautiously optimistic in our outlook for the 2021 financial year.”

Severfield is the UK’s market leader in the design, fabrication and construction of structural steel, with a total capacity of some 150,000 tonnes of steel each year. 

It does not actually produce that amount of steel, but it has that capacity. Previously it has been stated that it handles about 10% of the UK’s requirement, at some 90,000 tonnes per annum.

The group has five sites, with around 1,400 employees. It also has an established presence in the expanding Indian market through its joint venture partnership with JSW Steel, which is India’s largest steel producer. 

The company has almost unrivalled expertise in large, complex projects for a wide range of business sectors. 

As a group it can manage every aspect of the fabrication and construction process, from initial scheme designs, to specification and manufacture and up to the eventual product handover.

It has clients involved in schemes in the following sectors: power and energy; industrial and distribution; commercial offices; transport; stadia and leisure; retail; health and education; data centres and others.  

As a structural steel supplier it has over the years been an important participant in major projects such as Heathrow Terminal 5, the O2 Arena, Wimbledon Centre Court, the Shard, the 2012 Olympic Stadium, the Emirates Stadium, the First Direct Arena in Leeds, Birmingham New Street Station, and even the Paris Philharmonic Hall, amongst scores of others.

More recently its order book has included a range of projects in the UK, in the Republic of Ireland, and also in Europe. They have included 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.

The September AGM statement informed us that, in the UK and in Europe, all of its factories were fully operational and that all of its construction sites were open, with underlying operations performing well.

Impressively it declared that its order book for UK and Europe, at 1 September, was £270m, just £1m down on the comparative period last year.

Some 61% of the order book covers projects in the UK, with the remaining 39% relating to projects for delivery in Europe and the Republic of Ireland.

The group continues to be involved in the tendering for new business but has noticed some delaying of decisions due to Covid-19. There is still a mass of opportunities on offer, especially in its key market sectors.

There are some 307,624,828 shares in issue, which capitalises the group at around £204m.

Institutional holders include M&G (12.80%), JO Hambro (9.90%), Threadneedle Asset Management (7.58%), Legal & General Investment Management (5.47%), Invesco Asset Management (5.46%), Unicorn Asset Management (5.20%), Chelverton Asset Management (5.04%), Polar Capital (4.18%), Man Group Investments (3.02%), and Standard Life Investments (2.91%). 

Although we will get a much clearer guidance come next Tuesday, there are estimates that suggest sales for the year to end-March 2021 could well fall about 10% to £290m and that pre-tax profits could ease about 30% to £18.7m, worth about 5p in earnings per share.

For next year, hopes of a recovery to £315m in sales and £23.3m in profits would see earnings up to 6p per share.

The dividend for both years is estimated to have been maintained at around a 2.9p per share payment.

So, where are we? 

Well we do know that the Indian joint venture has been badly impacted by the virus – with sales well down reflecting a 20% drop in its £94m order book.

But Severfield, with its cash generative business model, does have a strong balance sheet and cash position, with sufficient committed funding in place until October 2023.

Obviously, price sensitivity will reign uppermost in the order book but there is still a major market for the UK’s largest supplier. 

Of particular interest is the group’s increasing ability in its special services in the construction of large data centres – especially attractive as corporate UK realises their importance in Covid-19.

Next Tuesday’s interim statement is eagerly awaited by me so that I can assess just where the shares are going.

In late February this year the group’s shares were standing at 96p, but by late August they were even lower than their end March price, standing at just 51.2p.

However, over the last few days the shares have been improving ahead of the results, closing last night at 65.5p. 

This group is such a specialist, with a strong market-leading presence, that I believe that its shares demand a much higher valuation than its previous sub-10 times earnings rating. 

My value scoring would put them out on 12 to 15 times earnings.

I have followed this company for decades and have remained a constant fan of its activities.

Despite whatever is stated next Tuesday about the last eight months or so, everyone has suffered, but it is about where the company is now and its future prospects.

I remain very bullish about the shares and see them going back up to their previous 2021 highs.

(Profile 12.09.19 @ 62p set a Target Price of 88p*)

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