An AGM update confirmed much of the year-end messaging and management expectations for FY20 are unchanged. Order book positions in the UK and India remain encouraging and there have been no discernible changes in pipeline opportunities. The earnings outlook appears solid and the 8.4x P/E and 4.9% prospective yield have appeal.
Firm order books in the UK and India
The UK order book has nudged up further (£301m versus £295m in June) to the highest reported level since November 2016. Moreover, the mix is more diverse now than it was then with material order values on hand in four core sectors, only one large current project (KGX1, initially £50m) and a significant proportion is now outside the UK (in the Republic of Ireland and continental Europe). We believe comments relating to a greater H2 skew to trading performance in FY20 are a natural corollary of the shape of the order book build (+ c £65m between November 2018 and June 2019) necessitating more early-stage projects in H1 and greater profit recognition as they progress into H2. The fact that the order book has been sustained/increased a little indicates that intake has been comparable to throughput so far in FY20 and the run rate for the next 12 months (£281m) is around our current FY20 projection. Project selectivity has stood the company in good stead in recent years and execution against tenders remains key to margin development.
In India, the JV order book is also stable at a record £134m. Management cites an expected improving proportion of commercial project work in both order book and pipeline, which bodes well for future margin development. The capacity expansion at Bellary (+30,000 tonnes to 90,000 tonnes total, to complete by the end of this financial year) is underway, which will facilitate increased throughput of higher-margin commercial project work in due course.
Valuation: Solid performer in a weaker sector
Severfield PLC (LON:SFR) share price is now down 13% year-to-date. To some extent this is understandable given downward revisions to UK construction and GDP expectations as the year has progressed and wider uncertainties prevail. However, the company’s order book has gone in the opposite direction and now has a greater non-UK hue and our estimates have not changed over the last 12 months. Consequently, the current year P/E and EV/EBITDA are now 8.4x and 4.9x, respectively, whereas the dividend yield is 4.9%.
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.