Hill & Smith drives margins despite cost pressures

Hill & Smith (HILS) was one of the top risers on the London Stock Exchange after it revealed record annual revenues and a 29 per cent hike in underlying constant-currency operating profits to £86mn. Admittedly, year-on-year comparators aren’t as revealing as they might normally be, but the producer of infrastructure and galvanised products benefited from recovering volumes in its key markets following pandemic related disruption in 2020.

All three of its divisions grew sales through 2021, although the Utilities business was probably the standout performer in terms of profit growth and margin progression on the back of rising demand for US engineered composite products. Closer to home, sales for the UK were up by a fifth on the prior year, as demand for building products rebounded strongly, although it would be unwise to assume that residential volumes will continue to grow throughout the year given the prospect of tightening credit markets.

That mightn’t be such an issue for the UK Roads segment, as work continues to flow through from the government’s Road Investment Strategy 2 (RIS2), which entails a £27.4bn commitment from Westminster to the UK road network over the period 2020-25. Revenues from road work in the US were also on the rise, although margins were constricted due to a marked increase in steel, raw materials, and freight costs. The US Senate passed a $1trillion (£763bn) infrastructure bill in November, but it’s unclear the degree to which this will be put towards physical infrastructure assets.

Hill & Smith obviously wasn’t immune to wider supply-chain issues through the year, and there is reason to think that problems could be exacerbated by the ongoing energy crisis and the deteriorating global security situation. Management expressed confidence that the group is well positioned to deal with this issue as it has proactively sought to secure raw material supplies. Although it’s too early to gauge the extent of any further disruptions through 2022, it is entirely possible that inflationary pressures will constain net earnings through the year.

However, it’s worth noting that the operating margin ticked up by 190 basis points to 12.2 per cent in the period under review. Analysts at Peel Hunt anticipate a commensurate increase through 2022 and they are also guiding for adjusted EPS of 79.3p a share, leading to a forward PE ratio of 18 times. That’s hardly bargain-basement territory, and we still think margins will come under pressure, but Hill & Smith’s exposure to the wider infrastructure does provide ballast to the investment case. On balance, we think that the medium- to long-term investment rationale is sound from a defensive perspective. Buy.

Last IC view: Buy, 1,688p, 11 Aug 2021