Hill & Smith Holdings PLC (LON: HILS)

Hill & Smith Holdings PLC (LON: HILS) is an industrial engineering Company engaged in the supply & manufacturing of galvanizing services and infrastructure products. It is listed on the FTSE 250 index. HILS operates through three segments: Roads & Security, Utilities, and Galvanizing Services.

On 10 March 2022, the Company will release FY21 financial results for the year ended 31 December 2021. 

Recent trend of dividend payments

HILS had paid an interim dividend of 12 pence per share on 07 January 2022, while the ex-dividend date was 02 December 2021. In comparison, the Company had paid an interim dividend of 9.2 pence per share for the prior year. Thus, the interim dividend growth remained around 30%.

 (Data Source: LSE Website, Research done by Kalkine Group)

Growth Prospects (also encapsulates details of a trading update released on 25 November 2021)

• Positive Industry Dynamics in the US: The outlook for the Roads business in the US remained positive. Moreover, the Company had made several investments towards the expansion of the rental fleet.
• Strategic Initiatives: HILS has undertaken several steps to implement price increases to combat input cost inflation, with steel being the most impacted category for the Group.
• Acquisitions & Disposals: The acquisition of Prolectric Services Ltd would consolidate the Company’s position in off-grid solar energy solutions. Meanwhile, the disposal of loss-making security access cover business and the closure of loss-making variable message sign business would improve the quality of the portfolio, in line with the refreshed strategy.

Key Risks 

• Supply Chain Headwinds: The Company had faced supply chain constraints regarding the availability of materials and labour. Moreover, the production capacity in some US galvanizing plants.
• Inflation Concern: Due to the inflationary pressure, the Bank of England increased the Bank Rate by 25 basis points to 0.50%. It can keep the equity market under pressure amid the rising US Dollar index.
• Reduction in Government Spending: HILS generates most of its revenues from operations located in the UK and the USA, and whilst it is possible that a reduction in Government spending plans may decline the pace of its development projects.

Key fundamental and shareholders statistics of Hill & Smith Holdings PLC. 

Aberdeen Standard Investments (Edinburgh) is the most significant shareholder as it holds nearly 6.36 million shares as of 31 December 2021.    

H1 FY21 Financial & Operational Highlights (for the six months ended 30 June 2021, as on 11 August 2021)

 (Source: Company Filings)

• Decent Top-Line Business: The Company posted revenue growth of around 12% from £315.6 million during H1 FY20 to £354.2 million for H1 FY21.
• Profitability: In terms of profitability, the Company’s profit before taxation grew by around 72% on an underlying basis during H1 FY21.
• Balance Sheet: Net debt as of 30 June 2021 stood at £154.6 million (31 December 2020: £146.2 million).
  

 Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 16 February 2022 at 10:26 AM GMT, HILS’s shares were trading at GBX 1,514.00, up by around 0.53% against the previous day closing price. Stock 52-week High and Low were GBX 1,922.00 and GBX 1,240.00, respectively.

On a daily chart, the MACD line has given a bullish crossover against the signal line. Hence, there could be an uptick in the stock price in the near term. Meanwhile, the 14-days RSI stood at ~44.84. 

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

HILS has replicated the positive momentum built during H1 FY21 in the first four months of H2 FY21 as it reported a decent top-line business growth. The Company has demonstrated flexibility, commitment, & resilience and is in a good position to emerge stronger in the future. Moreover, the Company has produced a strong trading recovery during 2021. Meanwhile, HILS had expected FY21 underlying operating profit to remain in line with analyst consensus expectation. Overall, the Company remained confident of achieving a medium to longer-term outlook, supported by strong growth drivers for both sustainable infrastructure and safe transport.

Considering the decent top-line business, sustainable business model, modest profitability margins, strong interim dividend growth, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Hill & Smith Holdings PLC at the current price of GBX 1,514.00 (as on 16 February 2022 at 10:26 AM GMT), with lower-double digit upside potential based on 22.14x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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