Steady start to the year
Year to date trading is described as satisfactory with no change to full year guidance and estimates. Severfield-Rowen (LONDON:SFR) rating is very much set for recovery and the new management team is positioned to deliver this, we believe. The current rating reflects our conservative stance on top line progress. Improving market confidence and activity levels would provide an opportunity to potentially deliver further margin gains.
UK operations working well together
UK business is said to be progressing well. In market conditions which are understood to be broadly flat overall, this suggests that the benefits of integrating three businesses in the first half of last year are continuing to flow through and operations are executing projects well. The order book position remains stable (at £171m vs £168m with FY14 results and no notable mix change). That said, management refers to ‘continuing signs of improvement’ – which, we understand, includes supply chain hires and tendering activity – that could potentially impact order book size and mix later in the year. This would be more likely to benefit FY16 trading than the current financial year. Pricing conditions are unchanged from earlier in the year and said to be stable.
India improving, but increased order intake required
Investors may focus on a reduced order book position at the Indian JV (£34m latest vs £41m previously reported) but the operational performance of the business - now with three fabrication lines - has improved. This is not quantified but suggests a lower loss run rate year to date. Management has previously stated that c £45m revenue to be a broad break-even revenue figure (subject to project mix). We have factored in a reduced loss rather than break-even for this year and see no reason to change this. The challenge remains to secure a larger order book position and work on this continues.
Valuation: Anticipating recovery
SFR’s share price has steadily improved from the June lows (53p) against a flat, to lower FTSE, outperforming by c 9%. Its markets are more stable but have still to demonstrate firm recovery steps and this is reflected in SFR’s rating with P/Es of c 27x, 19x and 14x across the next three financial years. EV/EBITDAs’ on the same basis are c 11.7x, 9.4x and 7.4x respectively. So, the rating is very much set for recovery. An expected return to the dividend list this year reinforces the recovery story.
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