Hill & Smith driven by Uncle Sam

Record numbers for Hill & Smith (HILS) at the half-year mark were reflected in a buoyant share price performance on results day. Once the divestment of erstwhile subsidiary, France Galva, is taken into consideration, group revenue increased by 19 per cent at constant currencies, while operating profit at £62.5mn was 38 per cent to the good on the same basis. The underlying margin rose by 240 basis points to 14.9 per cent. So management now believes that full-year profits will be “modestly ahead of current market consensus”.

The positive outcomes point to the overall resilience of the domestic UK market, aided by leading market positions in several niche areas in the infrastructure sector, although the outlier was in the UK galvanizing services segment where profits were constrained by reduced volumes and higher energy costs.

But it was the engineered solutions division that gathered the plaudits. It contributes around 43 per cent of group revenue, derived from a diverse range of industries including those engaged in energy generation, marine, rail, and construction. It also provides one of the main conduits into lucrative US markets. Operating profits at the division more than doubled to £30.9mn on the back of “strong volume growth in [the group’s] higher-margin US composite and structural steel electricity substation businesses” as Washington pumped further capital into upgrading the country’s ageing electric grid. Indeed, the divisional performance highlights how Hill & Smith’s heavier weighting towards US end-markets is having a positive impact on profitability.

It's an inherently capital-intensive business, but the solid financial performance has been predicated on prudential capital management. The working capital outflow in the period was £7.2mn, against £41.5mn last time around, representing a relatively modest 17.5 per cent of annualised sales. Debtor days were in line with expectations at 55 days, although they have reduced appreciably due to the offloading of France Galva. Capital expenditure at £12.7mn was down by a quarter on the first half of 2022 despite new investments in US composites and galvanising. Finally, the group generated £38.7mn of free cash against an outflow in the equivalent period last year, providing further scope for capital returns and acquisitions.

The shares change hands at 16 times Peel Hunt’s EPS forecast of 103.7p, which is just shy of the five-year average. But, given that several new infrastructure bills have already been signed into law under the Biden administration, we can expect those revenue channels will continue to provide enhanced regional opportunities. Buy.

Last IC View: Buy, 1,362p, 8 Mar 2023