Somero puts up prices

US-based Somero Enterprises (SOM) is exposed to the cyclical ups and downs of the construction sector. But the concrete-levelling equipment purveyor’s specialist focus and strategic attention on new products to drive long-term growth puts it in an attractive position.

A record first-half revenue performance was driven by an uplift in Somero’s key market, the US, where price increases and a “strong, active non-residential construction market” helped push sales up by 9 per cent to $56mn (£49mn).

But performance was mixed across smaller trading locales. Growth was posted in Australia and Latin America, but revenue fell in Europe and rest of world as shipping delays and the difficult trading environment in China had their impact.

While the top line put in a good shift, margins stuttered. The gross margin was down by 30 basis points to 58.3 per cent due to higher material and logistical costs. The adjusted cash profit margin fell by 290 basis points to 35.3 per cent as higher staff costs and cost inflation hit profitability.

Encouragingly, the $10mn Michigan facility expansion is on track. This will increase operating capacity by more than a third after completion, and is expected to be up and running in the fourth quarter. And new product growth brought more good news, with four products launched since 2019 contributing $3.2mn to first-half sales – up by 129 per cent on last year.

FinnCap Capital Markets said that “the shares remain undervalued”. This looks like the right conclusion, given the shares trade at just eight times the house broker’s forward 2023 earnings forecast. With a chunky dividend yield and strong net cash position, we remain bullish, even though the trading backdrop could certainly deteriorate. The shares are down by about a quarter year-to-date, but this presents an attractive entry point. Buy.

Last IC View: Buy, 548p, 8 Sep 2021