Somero: good value with income to boot

Somero’s undemanding valuation has a lot to do with a trading update in June that highlighted flat performance in North America due to poor weather and political uncertainty, and slow trading in China. The news prompted a share price fall, and we downgraded to sell. But the latest results and the value now on offer suggests it’s a good time to revisit the investment case. Indeed, even when faced with regional challenges, overall revenue rose from $39.7m to $42.4m in the six months to the end of June. Management also attributed higher first-half profits to cost management, price increases and better productivity.  

There are signs trading is now set to pick up. North American first-half sales were down 5 per cent year on year at $28.4m, but heavy rains subsided towards the end of the period. This resulted in the highest levels of trading seen all year at the end of June and positive indicators of a “solid” second half. North America constitutes around two-thirds of Somero’s overall top line.

The same story played out in China – first-half sales fell from $3.8m to $2.7m, but the best trading of the year was seen at the end of June. Management expects to see further improvements and is “re-looking at China” via a strategic review. China is estimated to use half of the world’s total concrete, representing a serious opportunity for Somero even if long-running fears of slowing economic activity play out.

Europe and Latin America were the group’s star performers, albeit starting at a lower base than North America. European sales rose 108 per cent to $5.4m, while Latin America’s leaped 750 per cent to £1.7m. The rest-of-the-world regions, including Australia, Southeast Asia, Korea, India, Scandinavia and Russia, also lifted revenues 79 per cent to $3.4m. New product sales contributed $1.4m, including the ‘S-158C’ model in China, the SP-16 Concrete Line Pulling and Placing System, and the ‘next generation’ 3-D Profiler System.

Meanwhile, first-half cash flows from operations rose 62 per cent to $9.4m, leaving the group with $18.3m net cash at the end of June. The healthy balance sheet underpinned the decision to pay the special dividend, which is expected to take the full-year yield to nearly 7 per cent. Further special payouts could be on the cards, adding to Somero’s appeal.