Analyst David Buxton at broker finnCap is maintaining 2016 forecasts that point towards a rise in full-year revenue from $70.2m to $75.1m and pre-tax profit of $18.9m, up from $17.6m in 2015. He notes that the update provides "additional confidence to forecasts and the tone [of the announcement] augers well for a positive second half".
This follows a strong operational performance in the final quarter of 2015, during which time sales hit an all-time high in December. As was the case then, the key to the ongoing positive momentum lies in the North American market which accounts for 70 per cent of Somero's annual sales. In particular, demand from non-residential building construction continues to benefit from customer demand for replacement machines, fleet additions, and product upgrades, too. When combined with new product introductions, price increases and a shortage of skilled labour in the concrete contractor industry, this is contributing to strong sales in North America. These factors are accretive to margins. The company also reported upbeat news from its European and Chinese markets that account for around 8 per cent each of the company's revenues.
In other words, segments that represent 85 per cent of annual sales are firing on all cylinders. They are likely to continue to do so given that European markets are showing a steady recovery from their recessionary low point in 2010-11, and in the US there are lengthy project backlogs for customers in the non-residential construction market that extend well into 2016.
Furthermore, with cash generation robust - net funds almost doubled to $12.6m (£8.8m), a sum worth 15.6p a share - shareholders can expect another step up in the dividend following a better than expected 25 per cent hike in the dividend to 6.9¢ (4.8p) in 2015. Analysts at finnCap predict a dividend this year of 7.2¢, or 5p a share at current exchange rates. On that basis, the shares are rated on a modest 10 times likely EPS of 14.4p a share this year after stripping out net cash on the balance sheet, and offer a prospective dividend yield of 3.1 per cent. That doesn't seem an excessive rating to me.
So, having initiated coverage on Somero's shares at 140p ('On solid foundations', 22 Apr 2015), and last recommended buying at 150p at the time of the full-year results ('A solid buy', 15 Mar 2016), since when the company has paid out the final dividend of 5¢ (3.4p), I continue to see value in the shares and maintain fair value at 185p, or the equivalent of 11.8 times cash-adjusted earnings.
On a bid-offer spread of 157p to 160p, valuing the company's equity at £90m, and offering 15 per cent upside to my fair value target, I rate the shares a buy.
