Catch Hill & Smith on the rise

Hill & Smith has benefited from a regular flow of EPS forecast upgrades since the start of 2014 (see graph below). We expect this trend, which has helped drive the shares upwards, to continue. The latest trigger for a 4 per cent upgrade to 2016 EPS forecasts was the group's acquisition late last month of UK galvanising company Premier for £15.5m - a price equivalent to 6.7 times enterprise value to forecast cash profits.

Hill & Smith EPS forecast upgrades

This deal extends Hill & Smith's domestic footprint, as well as enhancing margins for this already highly profitable part of Smith's business - in 2014 galvanising accounted for just 29 per cent of sales but 54 per cent of profit. The acquired company boasts a return on sales in the region of 28 per cent, which is about 8 percentage points ahead of what Hill & Smith's galvanising unit currently generates. The higher margin is a reflection of the lack of competition in the Hull and Corby markets where Premier is based.

The potential for earnings-forecast upgrades is also being supported by a positive infrastructure spending backdrop in both the UK, which accounts for almost half of group sales, and North America, which accounts for another quarter. In the UK, the Autumn Statement saw the chancellor, George Osborne, announce a new pot hole fund on top of his original pledge to treble spending on roads to £15bn. Other fresh UK commitments that could benefit Hill & Smith include extra housebuilding, which should buoy demand for the group's flood prevention and infrastructure kit, and the construction of nine prisons, which bodes well for the fencing operation.

Economic conditions in the US may be somewhat fragile, but Obama's government remains committed to its highway bill designed to spruce up the nation's crumbling infrastructure. That major investment is especially good news for Hill & Smith's galvanising business, which makes up the core of its US operations. Dipping components that make street lights, bridges and fencing in molten zinc to prevent them rusting is big business across the pond as the country's vast land mass means there's rarely much local competition, which keeps margins high. The company also stands to benefit from a recently opened £9.4m brownfield site in Memphis, not least because the plant has no rivals in a 200-mile radius.

In late November, Hill & Smith reported another robust period of trading in the four months to October. As expected, the government's drive to revamp the nation's motorways continued to fill the road division's coffers. These favourable trends are expected to continue for the foreseeable future. The only downside to the update was minor delays over the summer months to three Smart Motorway projects, although these are earmarked to return to normal activity in 2016.

Meanwhile, the group's core revenue generator, the utilities division, did a good job of compensating for the reduced appetite from oil and gas customers. And lower UK galvanising volumes in the period were more than offset by cost-cutting. Unfortunately, nothing could help the operation in France, which has come under pressure due to the weakening economy there.