Somero's growth shows no signs of levelling off

The upward momentum being generated at Somero Enterprises (SOM) must be pleasing for a company more used to keeping things flat.

The US-based maker of laser-guided concrete screeding equipment saw its shares hit an all-time high as it said it would more than double its half-year dividend following a stellar set of results.

A “rapid acceleration” of construction activity in the non-residential market in the US, which is where the company makes most of its money, meant gross margins widened by 390 basis points to 58.6 per cent.

North American sales were up 83 per cent to $50.9m (£37.1m), with a continued boom in e-commerce driving demand for big-footprint warehouses. US sales now make up 79 per cent of total revenues. European sales, which grew 56 per cent, make up 10 per cent.

The one fly in the ointment was China, where revenue dropped 6 per cent to $1.7m.

The pace of demand for quality flat-level floors from building developers and owners in China remains “very slow”, chief executive Jack Cooney said.

“Ultimately, it’s been a lot slower to take hold than we anticipated many years ago when we entered the market,” he added, stating that Somero will continue to evaluate its approach to the Chinese market.

“We have had some factors affecting the near-term performance, but we’re continually looking at the market and looking at how we can influence the demand for quality.”

The strong domestic market led to management upgrading its full-year forecasts. Revenue guidance has been upped by $10m to $120m and adjusted earnings by $7m to $42m. 

Its manufacturing plant in Michigan currently has the capability to handle around $130m of sales, so the company is spending $7.5m expanding it. Work will start on boosting capacity by 35 per cent by the end of this year, with completion due by the middle of next year.

Even with the increased spending on this project and the higher dividend, the company expects its net cash position to improve to $36m at the year-end.

House broker FinnCap upped its full-year earnings forecast by more than one-fifth to 55¢ per share, meaning the shares are priced at less than 14 times forecast profits. Despite a 76 per cent increase in Somero’s share price so far this year, it argued they “look cheap” at current levels. Given the market fundamentals and the scope for growth, this is hard to argue with. Buy.

Last IC View, Hold at 224p, 4 Sep 2019