Bargain Shares: On the road to a strong recovery

Barnsley-based Billington (BILN:220p), one of the UK's leading structural steel and construction safety solutions specialists, has delivered annual pre-tax profits materially ahead of analyst expectations, albeit the result was £0.4mn lower than in 2020 due to some projects being pushed into 2022, as previously flagged.

More important, the group started the new financial year with a strong order book that will benefit from higher-margin projects. Facilities are running at full capacity and management had the foresight to lock in contract margins by forward purchasing steel and stockpiling raw materials. This explains the £7mn increase in inventories, an astute use of Billington’s heavily asset-backed balance sheet to mitigate the impact of short-term price volatility in some of its primary input costs. The group still retains net cash of £9.4mn (78p a share), which provides financial security to customers.

The directors flag up ongoing improvement in the number and quality of customer enquiries, and a focus on several larger, more complex projects where competition is less intense (both contracted and tendered). Specifically, these are large retail distribution warehouses, data centres, 'Gigafactories', food processing developments, public sector works, rail infrastructure, and a return of some commercial office development projects. At the same time, the competitive landscape has improved due to the exit from the market of less well-capitalised rivals.

So, with the benefit of higher-margin contracts and lower price volatility, house broker WH Ireland forecasts Billington’s structural steel division could lift revenue by 10 per cent to £81.3mn this year and move from break-even to operating profit of £1.6mn. Analysts also expect the group’s smaller but higher-margin safety solutions activities, which offers perimeter-edge protection and fall-prevention systems for hire within the construction industry, to lift operating profit by 9 per cent to £1.4mn on slightly higher revenue of £9mn, a prediction underpinned by a healthy order book.

Source: London Stock Exchange

On this basis, expect group pre-tax profit to rebound from £1.3mn to £3mn on 9 per cent higher revenue of £90.3mn, rising to £4mn on revenue of £100mn in 2023 as the benefit of higher-margin business feeds through. Respective earnings per share (EPS) estimates of 19.3p and 25.2p imply the shares are rated on bargain basement cash-adjusted PE ratios of 7.3 and 5.6. Although the group took a rare impairment on a receivable with a prime contractor who entered administration, the directors are in dialogue with the developer to complete the project and recover the £1.1mn outstanding debt.

Trading around the entry point in my 2022 Bargain Shares Portfolio, the shares offer material upside to WH Ireland’s 350p fair value target. Buy.

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