Hill & Smith is on the right road

As the UK market leader for temporary barriers, gantries and other products necessary for the upgrade of motorways, Hill & Smith stands to be a major beneficiary of George Osborne's pledge to treble spending on roads to £15bn, and the election looks unlikely to derail the commitments made. The lion's share of its roads business's profits come from leasing temporary barriers in the UK and a recently completed £15.5m investment in barrier kit means Hill & Smith is well prepared to take advantage of the expected upswing in demand. The group also boasts a strong competitive advantage as it is the only provider that can offer supplementary products such as signs and bridges. That means contractors wanting a one-stop-shop need to use the Wolverhampton-based manufacturer for sizeable projects, leaving it well-placed to profit from the government's biggest road improvement programme for 40 years.

And the UK is not the only country keen to increase spending on infrastructure. Hill & Smith also has exposure to countries such as the US and Sweden. In these regions it is set to benefit from road safety concerns as well as the need to invest in the US transmission grid. The group began to focus on international expansion in 2007, and overseas growth helped it to withstand the credit-crunch-induced recession and increase sales as the recovery picked up. At present, a quarter of sales and nearly half of profits are generated from the economically resurgent US, 23 per cent of sales from the not-so-resilient Europe, and a further 6 per cent from other regions outside of the UK.

North America has been particularly profitable for Hill & Smith's burgeoning galvanising business. Galvanising represents 57 per cent of group profits and the US accounts for more than half of this. Dipping components that make street lights, bridges and fencing in molten zinc to prevent them rusting is big business across the pond, where increasing construction and infrastructure investment is driving demand. Transporting items to be galvanised represents a significant cost in the overall process, so higher prices can be charged at galvanising plants that have little competition nearby. The vast land mass of the US and diffuse manufacturing activity lends itself to the establishment of plants with little local competition, such as Hill & Smith's recently opened $10m (£6.3m) brownfield site in Memphis which has no rivals in a 200-mile radius. The plant is ultimately expected to surpass the bumper return on sales of 35 per cent currently generated from the company's existing six plants in the north-east. Unsurprisingly, further US expansion is expected.

Galvanising profitability is not as high in other regions, though. In the UK, for example, where Hill & Smith galvanises 172,000 tonnes of steel a year, return on sales is just 9 per cent, reflecting the country's highly concentrated manufacturing activity. In France, meanwhile, François Hollande's application to the ECB to release state-aid funding for infrastructure looks likely to be in vain, with cuts to government spending across the channel expected to continue for the foreseeable future. Nevertheless, wider distances between plants there does mean a 17 per cent return on sales on the 132,000 tonnes processed each year.

While analysts are excited about roads and galvanising, Hill & Smith's unglamorous utilities division gets less attention. This is the largest part of the group by revenue, but also the smallest by profit contribution, as products such as plastic pipe for flood alleviation and pipe supports don't command massive margins. Self-help measures, however, did help utilities deliver the group's biggest profits boost at the half-way point. Improving infrastructure spend in the US, too, could lift underlying operating margins from the current level of 4.6 per cent, as could rising demand for global nuclear power plants and falling raw material costs.