Higher costs prove no barrier for Hill & Smith

The half-year performance of galvanised steel specialist Hill & Smith (HILS) was as solid as the barriers it produces.

Revenue was up 12 per cent and a healthy widening of its operating margin, from 6.2 to 9.9 per cent, meant the company's operating profit jumped by nearly 80 per cent to £34.8mn.

One of the big concerns for investors in engineering groups this year has been how they handle cost inflation – particularly for energy-intensive users. Across all three of its divisions, Hill & Smith said it had been able to quickly increase prices to offset inflationary pressures. Indeed, the arm that offers hot-dip galvanising and powder coating of steel was its most profitable.

By contrast, the division that generated the smallest return is one that offers permanent and temporary steel safety barriers. It blamed the weaker performance of this division on the timing of road projects in the US and lower demand for temporary barriers in the UK, but said it expects both to pick up in the second half. 

Net debt increased by almost £21mn during the period, due to higher seasonal and working capital costs as raw material prices rose.

The company left its full-year group-wide guidance unchanged, adding a caveat that current foreign exchange rates could provide “potential outperformance” given that it earns about 45 per cent of its revenue in North America.

In March, we highlighted Hill & Smith’s defensive qualities due to the medium- to long-term growth prospects on offer in infrastructure markets on both sides of the Atlantic. That logic still stands and the 13 per cent slide in its share price since then means it trades below its five-year average at 15 times earnings. We maintain our buy stance.

Last IC View: Buy, 1,416p, 10 Mar 2022