Dutch deal steels Severfield’s margin

A downbeat assessment on the short-term outlook by management at structural steel specialist Severfield (SFR) led to some brief selling pressure, but the fact the company’s share price recovered by market close indicated that things aren’t all that bad.

Although the company reported challenging market conditions, with companies delaying the project starts and bidding prices described as “competitive” given a dearth of new tenders, the company was still able to report a 22 per cent increase in underlying operating profit to £14.8mn. Although there was some like-for-like operating profit improvement, much of this uplift was the result of a £1.5mn contribution from Voortman Steel Construction Holding – the Dutch steel fabrication company Severfield bought for €24mn (£21mn) at the beginning of April.

Severfield’s cash from operations more than doubled to £31.4mn, which the company attributed to a £15.6mn improvement in working capital – £10mn of which was due to a prepayment. This helped it to make inroads into the £18mn loan it borrowed to buy Voortman, and net debt was just £7.5mn higher than at the end of March at £18.2mn.

It may well take time for developers to regain enough confidence to push the button on big schemes but the uncertainty won’t last forever and Severfield was confident enough in the strength of its order book to increase its dividend by 8 per cent. House broker Liberum cut its earnings per share forecast by 3 per cent for this year and next on the softer outlook. Even with these revised estimates Severfield’s shares look cheap, trading at a price-to-earnings ratio of 7.3-times and 6.7-times, respectively. Buy.

Last IC view: Buy, 67p, 14 Jun 2023