We have updated our forecasts, assuming revenue at 80%/90% of FY20 levels in FY21/FY22, alongside some cost reductions. We forecast PBT of £20.3m/£25.4m in FY21/FY22 (FY20: £28.6m). We expect the balance sheet to remain strong, forecasting net cash exc. lease liabilities of £11.9m/£16.3m (FY20: £16.2m). The Group is trading on an FY21 P/E multiple of 13.4x, falling to 10.6x. We use the long term P/E rating of 12.9x on our FY22 forecasts to drive an 88p TP, which implies 21% upside to the current price. We believe Severfield has strong recovery prospects and move to Buy.
Results for the FY to March showed a 16% rise in PBT, with little impact from Covid-19. Financial guidance remains suspended, due to immediate uncertainties, but we believe longer-term demand will be fuelled by infrastructure, particularly HS2 projects which the UK’s leading structural steel group is bidding for, and logistics and data centres, boosted by the pandemic. The Group has a strong net cash balance and additional headroom and predicts sufficient cash for even its ‘worst case scenario’.
Severfield has confirmed there was no material impact on trading from COVID-19 in FY20. Its end March net funds position was above our expectations and its stated facility headroom was c £50m at that time. Understandably, the start to FY21 has seen disruption both in the UK, and from India’s lockdown status. The impact on trading is difficult to assess accurately so we are withdrawing our estimates beyond FY20 until the scale of the overall business impact can be better quantified.
Britain’s dominant structural steel manufacturer and contractor has indicated that trading in FY 2020E was in line with expectations, with no material impact from Covid-19. The group’s factories and majority of construction sites remain open, amid enhanced safety levels, but the outbreak will “inevitably” have an impact on profitability for FY 2021E, although it is not possible to quantify that. We have withdrawn our estimates for FY 2021E and 22E but believe the UK Government is prioritising the rapid reinstatement of infrastructure construction, evidenced by last week’s green light for HS2 construction.
Britain’s dominant structural steel manufacturer and contractor, we have recently indicated, could win a major slice of the supply chain from the construction of high speed rail line HS2, which last week got the green light from Prime Minister Boris Johnson. Here, we highlight some of the group’s capabilities in infrastructure on top of its traditional commercial construction core. It has indicated that it will compete to offer bridges, structural frames for stations and a range of other elements for what will be Britain’s largest construction project since the Channel Tunnel.
Broader exposure to more defensive sectors, European projects and Indian development has stood Severfield in good stead to attain its FY20 PBT target. The UK general election result may also see some return of confidence in the weaker sentiment sectors. The company is positioned for the next phase in its strategic development, although continues to be perceived as a cyclical UK construction company in our view.
Britain’s leading structural steel group could benefit from the revival of stalled construction and investment projects, potentially including HS2, following December’s conclusive General Election result, we believe. The improved outlook, supported in industry surveys, reinforces the group’s existing strategy, which has focused on new growth markets, greatly improved risk management and balance sheet strength. The Indian JV and acquisition of Harry Peers & Co could further boost prospects, in our view.
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 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.
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.
Due to a change in Analyst role, Cenkos Securities plc has suspended coverage of the following stocks (see table 1). Our previous recommendation and forecasts can no longer be relied upon.
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FY19 results were in line with guidance and our expectations, with the Indian JV performance a clear highlight, while investment and order book development in the year in both the UK and India bode well for future progress. In the near term, the dividend yield is an obvious attraction but we believe converting strong order positions into profitability represents the driver of share price progress from here.
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 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.
Well-flagged H119 results contained few surprises with a solid UK performance backed by gathering momentum in the Indian JV. Order book and margin development will continue to be tracked closely; management commentary on this and market developments have been consistently good and existing guidance is unchanged. We believe that Severfield’s well-financed, market-leading position will continue to be beneficial and steady growth in earnings and dividends is an attractive proposition for investors.
Severfield’s (SFR’s) AGM statement retained management’s existing guidance for FY19. The year has started well in the UK – a more even profit profile is anticipated overall – and confidence in the Indian JV’s outlook is supporting plans for further investment. Overall, it is a very solid update with a consistent message to investors. The recent ex-dividend share price move has increased the attraction of earnings-based valuation multiples.
Crossword Cybersecurity PLC* (NEX:CCS)—the technology commercialisation company focusing exclusively on the cyber security sector is exploring its options in relation to a potential move to the AIM market of the London Stock Exchange which, if it were to proceed, would likely take place over the next few months.
Path Investments (PATH) -RTO of a 50 per cent. participating interest in the producing Alfeld-Elze II gas field located 22 kilometres south of Hannover in Germany. Seeking £10m. Offer TBA. Due Mid September
Kropz PLC-Intention to float by the emerging plant nutrient producer with an advanced stage phosphate mining project in South Africa and exploration assets in West Africa
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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Full-year results were at a record level and slightly ahead of expectations by £0.2m at the adjusted PBT level, or 2.8% better at the EPS level. Cash generation was also stronger than expected, resulting in net cash of £3.2m. The dividend was maintained – a sign of confidence. Good strategic progress was made, helped by the integration synergies of Pacer and new product development programmes. Our forecast and price target remain under review given COVID-19-related uncertainties.
Companies: Solid State
The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
Companies: Avon Rubber
Brick and concrete products manufacturer Forterra has raised c. £55m gross in an equity placing in order to maintain its strong balance sheet and support the Group's continued investment programme. It was accompanied by, in our view, a reassuring trading statement which we believe is backed by yesterday’s brick industry data and comments from housebuilders, which suggest that demand has been recovering from its lockdown lows, before the PM’s promises to “build, build, build” housing and infrastructure.
Successful K3 Capital placing to raise £30.45m (gross) at 150p to fund the £9.3m acquisition of Randd UK Ltd, an R&D tax credit specialist with an LTM EBITDA of c.£2.0m, with a margin of c.50% and revenues typically contracted for 5 tax years with many recurring thereafter, followed by future potential deals in SME exposed markets. K3 has established itself as an innovative company that is able to effectively gather, generate and mine large quantities of data in order to scale up M&A services to SMEs. Transferring these lead generation capabilities to adjacent SME markets can allow rapid growth from proven models, at scale.
Companies: K3 Capital Group
Blackbird plc* (BIRD.L, 19.25p/£64.7m) | Mirada plc* (MIRA.L, 92.5p/£8.2m) | Tern plc* (TERN.L, 10.75p/£29.0m) | Checkit plc (CKT.L, 39.5p/£24.5m)
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Further Profitable Growth to Come
discoverIE reported FY20 results ahead of our forecasts for underlying operating profit and EPS. Looking through short-term COVID-19-related disruption, the company has set new strategic targets for the next five years. These are a continuation of the strategy to grow the Design & Manufacturing business organically and via acquisition and include the target to increase the group operating margin from 8.5% (pro forma) to 12.5%. We maintain our normalised operating profit and EPS forecasts.
Companies: Discoverie Group
Smart Metering Systems (SMS) has announced that it has emerged from the recent Covid-19 uncertainty in a strong financial position and taken the decision to return funds received from the Government under the Coronavirus Jobs Retention Scheme. Current net cash of £48m (not including furlough grant) is ahead of previous expectations and underlying profitability for the year to 31 December 2020 is expected to be in line with expectations prior to lockdown, despite the obvious interruptions to meter installation activity that it has caused. During lockdown essential emergency field engineering work continued and SMS completed the sale of a proportion of its meter asset portfolio for a gross cash consideration of £291m (£282m net). In March 2020, SMS announced that it would rebase its dividend to 25p (prospective yield 4.3%), index linked to FY24 and commencing payments in October 2020, quarterly thereafter. A phased resumption to meter installation activity commenced on 1 June 2020.
Companies: Smart Metering Systems
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
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Marlowe has raised £40m in new equity to finance the acquisition of Elogbooks (£7.3m cash upfront and up to £6.8m contingent deferred) and accelerate consolidation of their markets. We update our forecasts to reflect this transaction and COVID-19 trading conditions (FY21E Adj EBITDA unchanged at £24m).
Updating forecasts following 2019 results
Companies: Trackwise Designs
Full year results ahead - robust position against uncertain near-term backdrop
Solid State is a manufacturer of computing, power and communications products, and value added distributor of electronic components. This morning, the group has released full year results with PBT and EPS slightly better than our upwardly revised forecasts had assumed and reflecting a strong margin performance in the year. As previously flagged, cash generation was particularly strong. The group entered FY 2021E with a strong order book, which is reported to have stood at £37.9m as at 31 May 2020, an increase of some 5.6% from a year earlier. With little in the way of cancellations or deferrals of orders, Q1 2021E revenue has held up well, whilst order intake has been just under 15% lower than the prior year, which suggests a weaker revenue performance in Q2/Q3 but with the tender pipeline implying a potentially stronger Q4. Reflecting the present uncertainty, we leave our forecasts under review for the time being. Fundamentally, and backed by a strong balance sheet, we believe that Solid remains well positioned to come through the current crisis and will emerge as one of the winners when normal service resumes.
The Smart Zones customer base is expected to reopen, to a large extent, this weekend. The reopening of pubs will bring forward a revised billing profile and markedly improve the Smart Zones revenue base. Smart Machines continues to operate profitably and the group's Business Interruption Loan should buttress the balance sheet through this year. While our forecasts remain withdrawn we can see an encouraging pathway to normalised trading next year.
Companies: Vianet Group
As flagged in the April trading update, Solid State’s FY20 results showed a 19.7% growth in revenues and 34.3% jump in adjusted profit before tax. Demand from the medical and food retail sectors is strong but weakness in the oil & gas and commercial aviation sectors related to the coronavirus pandemic is likely to result in lower year-on-year sales during Q2 and early Q321. While management sees potential for a Q4 recovery, the current range of FY21 profit outcomes is wide, so it is not providing guidance.