Chancellor George Osborne is under immense political pressure to stimulate the economy. And how better to create jobs and improve productivity than by upgrading the nation’s transport links and energy networks? It may even be possible to get the private sector to foot much of the bill by using private finance initiative schemes. This could prove a major boon for Hill & Smith.
The Midlands-based firm is a manufacturer of infrastructure and steel galvanising products, such as pipes, safety crash barriers, street lighting and gantries. While there are currently a few challenges in the British roads division (due partly to disruption from the Olympics), other parts of the group are doing well.
The pipes division, which targets oil, gas and electricity generation plants, is going like the clappers. In America (47% of profits) there is a structural shortage of power with a transmission network in urgent need of an upgrade. Three hundred power stations need to be built in Asia too, all requiring the type of specialist pipework that Hill & Smith supplies.
CEO Derek Muir sums up the first half thus: “This has been a very encouraging six months, with our international spread, strong market positions and diverse portfolio of products serving us well in markets with mixed conditions”.
One aspect of British government spending that Muir believes will hold up well is the Managed Motorway Scheme (MMS). This provides increased capacity on the existing road network by opening the hard shoulder at peak times, which is much cheaper than highway widening projects. Here Hill & Smith provides an extensive range of products, such as temporary vehicle restraint systems, bridge parapets and electronic variable message signs. Six MMSs are due to come online shortly – more details should be available in October’s budget statement.
A decent chunk of the group’s other income comes from Europe (it offers galvanising services in France, for example), where the outlook is said to be challenging but stable.
Hill & Smith (LSE:HILS), rated a BUY by Investec
Rating: BUY at 330p (mkt cap £255m)
For the full year, the City is forecasting turnover and underlying earnings per share (EPS) of £430m and 37.3p respectively, rising to £452m and 40.4p in 2013. That puts the shares on a p/e ratio of less than nine, while also offering a 4% dividend yield. I would value the stock on a ten times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for net debt of £89.1m and a £15.9m pension deficit delivers an intrinsic worth of 425p per share.
So what are the big threats? Investors need to factor in the looming American fiscal tax cliff, ongoing recessionary conditions in Europe, foreign currency fluctuations and raw material costs.
Overall, though, I think the group’s geographic diversification strategy will continue to pay off and will provide a fair dose of resilience in the event of another macro-economic wobble. Investec has a price target of 420p.
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