Severfield: A stock for value and income
20th June 2018 12:33
by Graeme Evans from interactive investor
Despite a portfolio boasting some of London’s best-known landmarks, structural steel firm Severfield continues to struggle to get the credit it deserves.
That lack of recognition applies as much to the stockmarket as the wider public, given that shares are only trading in line with construction peers, despite being a market leader with a strong balance sheet and growth prospects.
The company, whose recent projects have included Tottenham Hotspur’s new stadium and the retractable roof for Wimbledon's No 1 court, demonstrated its healthy position with a special dividend of 1.7p a share alongside annual results showing a 19% rise in full-year profits to £23.5 million.
That nudged the shares into life, with today's 5% rise reflecting a stock now yielding 5.3% after also hiking its total dividend by 13% to 2.6p. Analysts at Jefferies and N+1 Singer are eyeing further progress with price targets of 95p and 98p respectively.
Source: interactive investor Past performance is not a guide to future performance
Severfield has been able to boost returns to shareholders thanks to a strong cash performance resulting in year-end net funds of £33 million. Today's special dividend makes up for 2014 and 2015 when the company paid no dividend at all as a consequence of growing too quickly prior to the economic downturn.
Under the leadership of Ian Lawson and now Alan Dunsmore, Severfield is back on an even keel and accounting for as much as 17% of UK structural steel production. Clients cover a broad range of sectors and regions, including Multiplex, Sir Robert McAlpine, LeadLease and Balfour Beatty.
It is well on track to meet a target set in 2016 of doubling its underlying pre-tax profits to £26 million by 31 March 2020, with the 2018 operating margin of 8.3% within the required range of 8% to 10% for the first time.
Despite the uncertainties of Brexit, Severfield continues to see a stable UK market, with an encouraging pipeline of work that includes Google's new HQ at Kings Cross in London. The order book at the start of this month was steady at £237 million, including £200 million over the next 12 months.
Other potential opportunities are likely to include major infrastructure projects such as HS2 stations and bridges, the expansion of Heathrow airport as well as ongoing Network Rail and Highways England investment programmes.
Speaking to interactive investor today, Dunsmore is particularly excited by prospects in the warehousing, distribution centre and data centre markets.
He said:
"These types of projects have clients who typically want quick build programmes. They want fast delivery, which is one of our specialities."
Other strong markets mentioned by Dunsmore include regional commercial property.
At a price earnings multiple of 12.5x for 2019, N+1 Singer analysts said they continued to see value in the shares.
They wrote:
"Severfield’s share price has remained subdued in 2018, hampered by poor sentiment towards the construction industry. We believe there are clear attractions that differentiate Severfield from the wider construction peer group."
They pointed to the company's market leading position in UK structural steel, its proven capabilities across multiple markets, as well as its strong balance sheet and attractive margin profile.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.