Operational deliverance overcomes weaker markets
Severfield PLC (LON:SFR) reported underlying operating profit that was up 14% to £37.7m despite a 6% decline in revenue to £463.5m as operational delivery overcame the impact of weaker market conditions. The implied underlying operating margin increased 140bp to 8.1%, which is the highest margin since 2020. Underlying PBT increased 13% to £36.5m, with underlying EPS rising 5% to 8.9p, from which the company anticipates paying a total dividend for the year of 3.7p, up 9%. Net debt came in at £9.4m on a pre IFRS 16 basis, benefiting from a £10m customer advance and a temporary £10m working capital swing, as previously advised.
UK orderbook robust, India returns to growth
Over the last six years, Severfield’s UK and Europe order book has grown materially, from £230m in 2018 to £478m at 1 June, more recently benefiting from the buoyant European market and the inclusion of the VSCH backlog. It has also considerably diversified over that period, reducing risk. Furthermore, the Indian orderbook also grew, from £165m in November to £181m at 1 June as the market remains robust. The outlook for both regions remains positive and we expect the order book to remain at elevated levels for the foreseeable future.
Valuation: Material implied upside
The orderbooks look robust and the market outlook in the UK and Europe and in India appear encouraging, given the plans for infrastructure investment by numerous governments. The £10m share buyback highlights the balance sheet strength and management confidence as well as underpinning future EPS growth. That said, we have reduced our top of the range FY25 PBT estimate from £37.5m to £36.0m, which is now in line with consensus. Our FY26 profit estimate is largely unchanged. Severfield is trading on an FY25 P/E of 8.1x, which compares favourably with the long-term average of c 10x, and the stock yields in excess of 5% an added attraction.
Adjustments to EPS reflect share buyback
On the back of the FY24 results we have reduced our top of the range FY25 underlying PBT estimate to bring it in line with consensus and trimmed revenue estimates to reflect the FY24 revenue that was lower than expected. We have also updated our forecasts for the share buyback programme, which explains the increase in EPS in both FY25 and FY26. The better-than-expected net debt performance in FY24 implies that the FY25 net debt estimate post the share buyback is unchanged.
Material P/E valuation discount; balance sheet unstretched
On our FY25e EPS of 9.4p, Severfield is trading on a forward P/E of 8.1x, which is below the lows hit during the recent nadirs when it touched c 6x P/E and well below the long-term average of c 10x, which suggests that economic weakness is reflected in the valuation. While we accept this is a rational fear, we would argue that the policy response from the UK government has been supportive of investment in the built space and that Severfield’s order book, coupled with the long-term nature of many of its projects, means that the outlook for the company is much more positive than the current low P/E rating suggests.
Furthermore, Severfield’s balance sheet is arguably under-stretched, with an FY25e net debt/EBITDA ratio of c 0.5x, and given the cash-generative nature of the business, it could be close to debt-free by March 2027 post the Voortman acquisition, which is less than three years from now, despite paying c £10m pa to shareholders in dividends. The dividend is growing and yields over 5% at the current price.
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