Severfield steadfast with prospects brightening

Structural steel fabricator Severfield (SFR) has held onto its dividend and benefitted from a sales uptick in the six months to 30 September, with revenues up 40 per cent to £186m, while underlying earnings were broadly flat on the 2019 half-year.

The group, which has previously been engaged in high-profile projects such as London’s Shard and the new Tottenham Hotspur ground, did well out of Covid-19-friendly distribution and data centre construction during lockdown, according to chief executive Alan Dunsmore. In all, the group undertook work in over 80 projects in the UK, Ireland and continental Europe, many of which were not subject to undue disruption.

The UK and Europe order book stood at £287m at 1 November 2020 (1 June 2020: £271m), including new nuclear orders secured by Harry Peers, acquired in October 2019. Severfield is looking towards new demand from long-term infrastructure projects, including opportunities linked to HS2, Highways England projects and the £5bn in infrastructure spending promised by the government. And the market backdrop is more favourable than management might have predicted earlier in the year.

The IHS Markit PMI manufacturing index for November showed heavy industry surging, although IHS Market also flagged a “sharp lengthening of supplier delivery times amid severe delays at UK ports”. BMO Capital Markets analyst Colin Hamilton said the Eurozone, somewhat surprisingly, had fared better than expected according to the October PMI manufacturing figure. “The reading fell expectedly amid renewed lockdowns or restrictions across major European economies, although it remains comfortably in expansionary territory, suggesting industrial activity in most countries has not been significantly impacted,” he said. Germany led the way while France’s stricter Covid-19 rules saw construction activity fall back.

There are also Brexit considerations on the horizon. Industrial firms are preparing for a possible change in trading arrangements with the European Union (EU), the prospect of which has already been driving industry inventory levels. They could conceivably alter regardless of any year-end settlement given that Members of the European Parliament have again called on the European Commission to revise its March 2020 proposal on the EU's new industrial strategy. That will be significant regardless of our departure from the trading bloc.

Beyond the vagaries of trade agreements, Mr Dunsmore said that commercial real estate - a key end-market thought to be at risk from new working habits - was getting started again. “Even developers are starting to come back and talk about future projects that were put on hold April, May, June time,” he said. With prospects improving, we retain out buy call. Buy.

Last IC view: Buy, 75p, 17 Jun 2020