Billington expects profits to rise 70%

Barnsley-based Billington (BILN:385p), a leading structural steel and construction specialist, has raised guidance once again. The directors now expect full-year pre-tax profit to increase more than 70 per cent to £9.9mn, or 24 per cent higher than house broker Cavendish had been forecasting ahead of the interim results. Moreover, analysts pushed through mid-teens upgrades earlier this year, too.

Although softening steel and energy costs are behind the latest £1.9mn profit upgrade, there is an ongoing strong recovery story at play as the group wins technically more difficult work at higher margins in robust market segments (data centres, renewable energy projects, large industrial warehousing, film studios and stadiums). Furthermore, chief executive Mark Smith revealed to the IC that the group is on the cusp of securing multiple projects that will further underpin next year’s revenue forecasts. A healthy number of tender opportunities in the pipeline include a scheme in Europe with a client believed to be Google, the second phase of a large data centre project in Slough, and a major energy-from-waste (EFW) project with Hitachi.

The opportunity in Europe is worth noting, too, as it will enable Billington to mitigate any potential weakness in the domestic market in the event of a deeper UK economic slowdown, while at the same time delivering better margins.

Rock-solid finances

Billington’s rock-solid asset backing and potential to deliver a higher margin on rebounding sales were two key bull points when I included the shares, at 214p, in my 2022 Bargain Shares Portfolio. That’s still the case. Net cash doubled to £10.8mn year on year and is expected to rise to £14.8mn (122p) by the year-end, a sum equating to a third of its market capitalisation of £46.6mn.

That’s good news for the annual dividend. Having lifted the 2022 payout fivefold to 15.5p a share, finance director Trevor Taylor is comfortable with Cavendish’s 20p-a-share current-year forecast, which will cost £2.4mn. Taylor also notes that the directors are actively looking at acquisition opportunities to deploy some of the surplus cash.

Admittedly, this year’s gains in energy costs and structural steel prices are one-offs as new contracts with customers are being priced at levels that factor in current prices, so margins will normalise next year. However, this is still a business that could deliver both operating profit and pre-tax profit of £8mn and earnings per share (EPS) of 49.3p on similar annual revenue of £115mn in 2024.

On this basis, Billington is rated on a 33 per cent discount to larger rival Severfield on an enterprise valuation to 2024 operating profit multiple even though the smaller company’s eye-watering return on capital employed (ROIC) of 38 per cent is double that of its rival. In addition, Billington offers scope to deliver earnings upgrades through bolt-on acquisitions.

Material upside to analysts’ fair valuations

The holding has delivered a 5.2 per cent total return (TR) since I covered the annual results in mid-April (‘Profits are booming at this takeover target’, 18 April 2023), during which time the FTSE Aim All-Share TR index has fallen more than 10 per cent. It has also delivered an 86 per cent gain in my 2022 Bargain Shares Portfolio, a marked outperformance of its benchmark index, which has lost 30 per cent of its value in the same 19-month holding period.

The foundations are in place for the relative and absolute outperformance to continue as highlighted by the 541p share price target of Cavendish. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.