Severfield’s AGM statement highlights that FY24 is expected be in line with management expectations and that the quality of the orderbooks – both in the UK and Europe, and India – remains a key support for the future. That said, the outlook for the UK and continental Europe is less robust in the short term than it was due to the impact of high inflation and the rising interest rate cycle. The FY24e P/E rating of c 7x remains comfortably below the long-term average of 10.0x, implying that some risk is discounted in the rating. The stock yields more than 5%.
UK order books remain elevated; Indian book grows
The AGM trading update confirmed that trading in the first five months of FY24 was in line with Severfield’s expectations and that its cash and balance sheet positions remained strong. Furthermore, its UK and Europe order book continued to be high quality and remained elevated at £479m as at 1 September 2023, modestly down from £510m three months before. The decline should be seen in the context of the November 2018 to November 2020 period, where the order book averaged £280m. In India, the reverse was true, with strong underlying demand resulting in a material increase in the order book from £139m on 1 June to £170m on 1 September.
Strength, but market shows pockets of weakness
Since 1 June, Severfield has secured high-quality new work and variations to existing contracts, which provides good visibility into 2024 and beyond. This was supported in the UK and Europe by the recent Voortman Steel Construction acquisition, which is integrating well. However, the high inflation and rising interest rate environment has caused some delays in converting pipeline opportunities into firm orders, particularly in the distribution sector. Challenging market conditions were also a factor in Sunset Studios’ decision to pause construction of a new base in Hertfordshire. This has been removed from the orderbook, but the project itself has not been formally cancelled.
Valuation: Continues to indicate material upside
Given the strong order books, we would argue that the medium- to long-term outlook for Severfield remains encouraging. We have made no changes to our forecasts for FY24 and FY25, but it should be noted that the markets are less strong than they were in the summer and that, further out, risks have begun to edge up. The company is trading on an FY24e P/E of 7x, which compares favourably with the long-term average of 10x. The yield of more than 5% is an added attraction.
Exhibit 1: Financial summary
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