Winter winner stock Hill & Smith just keeps rising

Strong structural growth drivers continue to feed a recovery from last summer's profit warning. Graeme Evans reports on the latest surge. 

Even if these are early days for our pair of Winter Portfolios, the perennial FTSE 250 index star performer Hill & Smith is wasting no time justifying its inclusion.

Shares in this maker of safety barriers and other road and utilities infrastructure are now up 16% since the start of November, driven by a rapid recovery in sentiment following a weather-related profit warning in August.

At the time of the downgrade, we asked whether a 20% slump for shares had opened up a buying opportunity in a stock boasting a proud record of 15 years of successive dividend increases and a steadily rising share price.

That certainly appears to have been the case, with today's third quarter update confirming that the company is back on track and performing well since extreme bad weather in Q1 caused short-term delays to some road projects.

Hill & Smith shares clearly do well in the colder months, with a decade of positive returns averaging 18.1% meriting its inclusion in our Consistent Winter Portfolio for 2018/19. The other four stocks on the list are Howden Joinery, InterContinental Hotels Group, Greene King and Croda International.

Peel Hunt said today's update showed that the share price reaction to the August interims had been too harsh. Based on a projected price/earnings multiple of 14x and with a 2.9% dividend yield, the broker has a target price of 1,380p. Shares topped 1,500p in the summer.

Source: TradingView (*) Past performance is not a guide to future performance

Analyst Henry Carver added:

"The outlook is robust, and in an environment where there is increasing uncertainty around the wider macro environment for industrials, Hill & Smith’s end markets look very attractive."

This was demonstrated last month by Chancellor Philip Hammond's announcement of increased funding for the UK road network. 

Under its Road Investment Strategy 2 (RIS2) programme, the government plans to lift spending in the period between 2020 and 2025 to £25.3 billion, up 66% on the current five-year RIS1 programme.

And as anyone who has spent time driving around the UK will testify, roadworks for the creation of smart motorways seem to be springing up everywhere.

Highways England is adding more than 4,000 miles of extra capacity through these motorways, which relieve congestion by making the hard shoulder available for use by traffic. This is creating demand for Hill & Smith’s services, including gantries to highlight changing speed limits or hazards ahead.

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.

•    A rocky road for FTSE 250 star

Significant investment in the replacement of ageing infrastructure and new infrastructure projects in the United States is also boosting the Solihull-based company, which employs 4,400 staff in seven countries. It bolstered its US operations today with two bolt-on acquisitions in utilities and composites.

The new additions prompted a 1% rise in the earnings per share forecasts of Investec Securities for 2019 and 2020. The broker said it was reassuring that organic revenues growth of 5% in the four months to October 31 was back in the range of recent years of between 3% and 5%.

A de-rating for the sector means Investec's target price on Hill & Smith still declined to 1,250p from 1,385p today. However, they added:

"We continue to see strong structural growth drivers from continued infrastructure investment in both the UK and US."

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.