Severfield PLC (LON: SFR)

Severfield plc is an FTSE ALL Share index listed structural steelwork company based in the United Kingdom. The Company is focused on the construction contract business and serves the construction and infrastructure markets consisting of commercial offices, industrial and distribution, stadia and leisure, retail, and data centres.

On 23 November 2021, SFR will release H1 FY22 financial results for the half-year ending 30 September 2021.

Recent trend of dividend payments

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

The chart above demonstrates the consistent dividend payment done by SFR from FY16 to FY21. In FY21, SFR paid a final dividend of GBX 1.8 per share on 4 September 2021, taking the full-year FY21 dividend to GBX 2.90 per share.

Growth Prospects

• Diversified Market Sector: The company caters to multiple industries and sectors with no major exposure in a single sector or company. It creates a natural hedge against any industry or geography related risk and improves margins and negotiations.
• Market Leadership: Severfield is the UK’s market-leading structural steel company, known for delivering world-class engineering and design excellence. The company has a huge experience and capability in the design, fabrication and construction of steel structures.
• Solid Orderbook: The Company has seen solid growth in H1FY22 of around 11% in the UK and Europe, and in the Indian market, the company has witnessed a solid demand in the order book with a growth of more than 40% on a QoQ basis.

Key Risks 

• Increasing Freight rates: Any increase in freight rates could put pressure on the delivery cost, impacting the margins of the company.
• Disruption in the Supply Chain: The failure of a key supplier to meet its contractual obligations could potentially result in some short to medium-term price increases and other short-term delays and disruptions to the Group’s projects and operations.
• Other Significant Risks: SFR is also exposed to climate change, legislative, fiscal, and regulatory developments, economic and financial market conditions, and risks associated with the impact of the pandemic.

Now we will analyse some key fundamental and shareholders statistics of Severfield PLC.

Trading update (for first five months of FY22 as reported on 1 September 2021)

• Unchanged Guidance: Despite recent steel and inflationary pressures, the outlook for FY22 remains unchanged, with higher profits realization in H2 FY22.
• Robust Order Book: The UK and Europe order book with significant value of new orders stood at £376 million as of 01 September 2021 against £301 million as of 1 June 2021, of which £291 million is for delivery over the next 12 months. Out of the total projects, 90% represents projects in the UK, with the remaining 10% representing projects for delivery in Europe and the Republic of Ireland
• Strong Indian Markets: The Indian market showed resiliency as the projects resumed their operations post the second wave of Covid-19 in the region. The order book now stands at £135 million, with 60% of the order book represents higher-margin commercial work, with the remaining 40% representing industrial projects

Financial and Operational Highlights (for the twelve months ended 31 March 2021 as of 16 June 2021)

(Source: LSE Website)

• Decent Revenue Growth: The company reported a growth of 11% in revenue, despite of Covid-19 uncertainties.
• Acquisition Benefits: The Company acquired DAM Structures, which gives immediate access to attractive, complementary market sectors with strong growth potential, including the propping, railway, and steel piling market
• Rise in Number of Projects: The Company remained focused on diversifying the projects as the company took more than 100 projects in FY21 across the UK, Ireland and continental Europe in diverse market sectors including industrial and distribution, data centres, nuclear and commercial offices.

Financial Ratios (FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 15 October 2021, at 11:08 AM GMT+1, SFR’s shares were trading at GBX 69.40, same as the previous day closing price. Stock 52-week High and Low were GBX 84.84 and GBX 52.98, respectively.

On a daily chart, SFR's price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last one year, SFR’s stock has delivered a decent positive return of ~29.69%. Also, it has outperformed the FTSE All-Share Construction & Materials index with a return of about 23.67% and the FTSE All-Share index with a return of about 25.23%.

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

Business Outlook

The Company had replicated the improved business performance of FY21 in the first five months of FY22 as well. However, the rising steel price and other inputs price would adversely impact the working capital in the short term. Moreover, the profit for FY22 would remain more weighted towards the second half. SFR remained well-positioned with the future workload for the remainder of the 2022 financial year as UK & Europe order book reached record level of £376 million as of 01 September 2021. Overall, the Company remained well-equipped to generate consistent returns for the shareholders with a robust order book across Europe & the UK.

Considering the record order book in UK & Europe, revenue growth during FY21, regular dividend payments, the better profitability, liquidity and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Severfield PLC at the current price of GBX 69.40 (as on 15 October 2021 at 11:08 AM GMT+1), with lower-double digit upside potential based on 11.43x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*The dividend yield is subject to change as per the stock price movement.

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