Higher order books in the UK and India are a positive way to end FY19, which concluded in line with previous guidance. UK market conditions appear to be stable while India is continuing to strengthen. Year-end net cash is similar to H1, and slightly below where we had previously expected, but Severfield PLC (LON:SFR) retains its conservative balance sheet position. Save for the net cash adjustment, our estimates are unchanged; the P/E rating reduces from 11.1x for the trailing year to 10.3x for FY20 with EV/EBITDA equivalents of 6.8x and 5.9x respectively.
Solid UK operational performance and rising orders
The reported year-end order book of £274m is Severfield’s highest in the UK since November 2016, up from £230m at the interim stage. New project work in the Netherlands represents c £10m of this and traction in one of three highlighted new growth areas is to be welcomed. There are fewer large live projects on hand (the Google (NASDAQ:GOOGL) HQ is the largest) but underlying margins are understood to be stable with operational performance and workflow mix effects balancing out. We believe the order intake pattern will influence the shape of FY20 trading. New business wins have continued into the new financial year and management still sees a stable pipeline of opportunities.
Building order book and capacity in India
At £149m, the Indian JV order book has climbed to another record level (a further material increase from £124m at the H119 stage) reinforcing confidence in capacity expansion. This is underway (adding c 30,000 tonnes or c 50% to fabrication capacity), with completion expected around the end of FY20. Importantly, the commercial mix of the order book is improving (to nearer 50% of the total now) and this should have positive implications for margins as the projects move through to construction completion over the next couple of years.
Valuation: Positive sentiment trigger
Having trading around its year low in March, Severfield’s share price has recovered and regained the levels last seen following its H1 results in November and, as a result, it is up c 4% YTD (versus c 11% for the FTSE All Share Index.) Our post results valuation comments remain valid; the prospective P/E, EV/EBITDA and dividend yields of 10.3x, 5.9x and 4.0% all represent reasonable entry points in our view. We have previously flagged order book development as a potential positive trigger for sentiment and the latest newsflow is certainly providing good grounds for such a response.
Business description
Severfield is a leading UK structural steelwork fabricator operating across a broad range of market sectors. An Indian facility undertakes structural steelwork projects for the local market and is fully operational.
