Has a wrong turn by road safety barrier firm Hill & Smith opened up a buying opportunity in this FTSE 250 star? Graeme Evans investigates.
As the maker of road safety barriers, street lights and pipe supports, Hill & Smith Holdings has given investors a pretty smooth ride following 15 years of successive dividend increases and a steadily increasing share price.
That progress hit a pretty sizeable pothole today as the Solihull-based FTSE 250 company revealed a disappointing half-year performance caused chiefly by factors outside of its control.
Having previously highlighted the impact of cold weather on its UK business in a trading update in May, Hill & Smith said it no longer thinks it can make up the shortfall in the second half of the year.
Headwinds include short-term delays to some road projects and a more cautious UK investment environment, while zinc commodity prices have been volatile and impacted raw material costs in the UK and the United States.
With first-half results below the expectations set out in May, shares tumbled more than 20% to 1163p amid today’s reduced guidance.
Chief executive Derek Muir stressed that order books for the second half were still strong, adding:
"Despite this disappointing first half performance, the fundamentals of our niche infrastructure markets remain encouraging."
His optimism has been backed by analysts at Investec Securities, who remain confident that longer term prospects across the group are robust.
In their note - "Caught in a UK jam, but the traffic will flow" - the Investec team downgraded their earnings per share forecast (EPS) for 2018 by 6.8%.
Following today's 9% drop in EPS to 32.8p, they added:
"The outturn is a disappointment for a company that had built a strong reputation of constant delivery."
Investec's target price has fallen to 1385p from 1530p, but this still offers a 20% upside on the current share price.
The bank's forecasts are based on a projected 2018 price earnings multiple of 20.2x, with a dividend yield of 2.1%.
Peel Hunt is also reviewing its 1550p target. Analyst Henry Carver said:
"This is undoubtedly a wobble, but Hill & Smith continues to have a strong position in robust global end markets, and the work lost this year will come through next."
In 2017, the company declared its best ever trading performance with strong organic revenues growth lifting profits 15% to £78.5 million. This resulted in a full year dividend of 30p, up 14% and the fifteenth successive year of increase.
Around a third of its revenues come from road-related infrastructure, with a similar level from utilities projects as well as its galvanizing services division, which provides corrosion protection in the form of zinc and other coatings.
The company said today its US and other international businesses continued to perform well, driven by significant investment in the replacement of ageing infrastructure and new infrastructure projects.
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