Hill & Smith (HILS) delivered a positive trading assessment of the first half of 2021. Reported earnings came up short of the H1 2020 comparator due to an increased tax charge, but reported profitability was on the rise, albeit against a problematic trading period last year.
Underlying operating profit for the period came in at £42.5m (2020: £26.8m), while the associated margin increased by 350 basis points to 12 per cent. Perhaps the most illuminating feature was that the infrastructure group registered 6 per cent revenue and 9 per cent profit growth on an organic constant currency basis compared with H1 2019.
Numbers are clearly moving in the right direction and the improvement has been broad-based. The group’s roads sub-division delivered revenue and profit ahead of 2020 and 2019, as demand strengthened in the domestic UK market and in the US, the latter geography a potential catalyst for growth over the medium term.
Rising US demand also served to boost numbers for both the Utilities and Galvanising divisions, although prospects for the group’s security businesses remain uncertain due to the potential for further clampdowns on public gatherings in response to the pandemic.
The group has not been immune to supply chain disruption, although management said that it has been able to mitigate problems linked to security of supply for raw materials through its decentralised autonomous operating model. It means that regional and divisional managers can take immediate action in response to the rapidly changing trading conditions brought about by the pandemic. The reality is, however, that regardless of the agile business model, raw material price inflation, labour shortages in the US and related wage demands, still stand as potential headwinds going forward.
The group is placing great emphasis on the monitoring and development of its environmental, social and governance (ESG) strategies. Without wishing to sound like a cynic, often this is undertaken by companies to ensure that they comply with investment fund mandates. For Hill & Smith, a demonstrable commitment to ESG principles could conceivably help the group to secure contracts that flow on from the $1 trillion bipartisan infrastructure package that has just been passed by the US Senate (it still needs to pass muster in the US House of Representatives). It is widely held that US infrastructure is both dangerously overstretched and lagging that of its economic competitors. But the Biden administration has already signalled that ESG considerations will be central to the award of US public works contracts.
Closer to home, the group is encouraged by the commitment of Whitehall to increased levels of funding under the Road Investment Strategy 2 programme (2020 to 2025). And medium- to long-term prospects will also be influenced by the ongoing parliamentary review on the benefits and safety of Smart Motorways.
The half-year figures are probably less important than the unfolding narrative in the US, but management now guides that underlying operating profit is expected to be slightly ahead of the top end of current analysts' range. In response, analysts at Peel Hunt have increased their full-year earnings estimate from 71.4p to 75.8p a share, leading to a forward rating of 22 times forecast earnings – not prohibitive given the outlook for infrastructure. Buy.
Last IC view: Buy, 1,486p, 17 Jun 2021
| HILL & SMITH (HILS) | ||||
| ORD PRICE: | 1,688p | MARKET VALUE: | £1.34bn | |
| TOUCH: | 1,686-1,696p | 12-MONTH HIGH: | 1,698p | LOW: 1,157p |
| DIVIDEND YIELD: | 1.7% | PE RATIO: | 66 | |
| NET ASSET VALUE: | 405p* | NET DEBT: | 48% | |
| Half-year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2020 | 316 | 19.5 | 19.7 | 9.20 |
| 2021 | 354 | 20.8 | 15.0 | 12.0 |
| % change | +12 | +7 | -24 | +30 |
| Ex-div: | 02 Dec | |||
| Payment: | 07 Jan | |||
| *Includes intangible assets of £184m, or 231p a share | ||||
