Hill & Smith drives US revenues and profits

Hill & Smith (HILS) has lauded the performance of its US businesses, describing a “standout performance in composites and electrical utility”. The stateside segment contributed 76 per cent of underlying operating profit in 2023, which rose by 26 per cent to £123mn. This was on the back of a 150 basis point hike in the operating margin to 14.8 per cent.

Exposure to the US market could well increase as the provider of sustainable infrastructure products also announced that it had acquired FM Stainless, located in Ellijay, Georgia, a manufacturer of stainless-steel pipe supports. Among other benefits, the £6.6mn deal should generate "material cross-selling opportunities in an attractive growth market”, according to group chair Alan Giddins. The tilt for FM Stainless follows £48mn that was invested in “growth and margin accretive acquisitions” last year, all of which are trading in line or ahead of expectations. With a promising M&A pipeline in prospect, and a lowly covenant leverage of 0.4 times Ebitda, we should expect further deals over the medium term.

Hill & Smith is making progress towards achieving its medium-term financial framework with annual performance targets, as set out in March 2023. Management maintains that improved capital allocation is demonstrated by the 280-basis point increase in the group’s return-on-invested-capital to 22 per cent. It also helps that cash generation remains strong, with a conversion rate of 115 per cent in 2023.

The forward rating of 17 times FactSet consensus earnings is slightly up on the long-term average, so we might normally call time on our “buy” investment case set out in July 2021. Yet the structural drivers linked to US infrastructure remain in place and the group has a pleasing tendency to outstrip earnings projections. Buy.

Last IC view: Buy, 1,686p, 9 Aug 2023