The acquisition of Harry Peers & Co brings additional expertise to the Severfield portfolio, with particular strengths in relatively robust infrastructure sub-segments. The deal enhances our earnings estimates by over 6% in a full year and raises Severfield's (LON:SFR) three-year EPS CAGR to FY22 to just over 8%, and good order book positions provide some comfort given domestic near-term eco-political uncertainties.
Specialist structural steel supplier
Harry Peers is a well-established, Bolton-based, specialist supplier of structural steelwork to the nuclear, power generation and process industries, each of which has a number of subsectors. Like Severfield, it provides a full design, fabrication and erection service and uses subcontract suppliers to add flexibility to the management of fab capacity, which is understood to be around 4,000 tonnes pa. Peers is understood to have a particular capability in the fabrication of modular structures which facilitate onsite installation. As well as having accreditations in the nuclear and defence sectors, the company’s delivered project portfolio also includes chemicals, petrochemicals, pharmaceuticals plant structures and energy from waste facilities.
Earnings uplift, company retains a net cash position
In the year to April 2019, Harry Peers turned over £21.2m, generating £3.4m PBT. Allowing for some favourable final settlements, normal EBIT margins would appear to be in the low double-digit percentage range. Consideration is an initial £18m net of cash acquired (£30.4m gross) with a potential further £7m deferred, depending on factors including profitability, order book development and other undisclosed qualitative factors. We would expect Severfield to bring steel purchasing synergies to the acquired business, further improving its competitive position, while finance and HR functions will be aligned. For now, our revised estimates point to a c 3.7% enhancement to expected earnings this year and over 6% in the following two years, and we project that Severfield will end FY20 with a c £13m net cash balance, subject to period-end project positions.
Valuation: Favourable response to newsflow
After a share price rally in the last month following the AGM update, Severfield’s P/E and EV/EBITDA are now 9.5x and 6.2x respectively, for FY20 with a prospective dividend yield of 4.2%.
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 currently being expanded.