Touch the sky with Severfield

Severfield has been making solid progress over recent years. The company's "smarter, safer more sustainable" strategy has made it more selective in the projects it takes on and improved its handling of project risk. At the same time, the group has focused on internal efficiencies. This has been reflected in impressive margin improvement over recent years.

The return on capital employed – a key measure of quality – nudged down from 16.5 per cent to 15.7 per cent, but this is still a healthy level and well ahead of the group's target of 10 per cent through the economic cycle. A £7.9m lift in working capital outflow reduce operating cash conversion from 77 per cent to 50 per cent, but management is confident this will return to the target level of 85 per cent as the timing of key payments get back to a more normal pattern.

Uncertainties about the UK economy are a concern, but a key cause for shareholder excitement lies away from Severfield's traditional markets. There has been a significant push into Europe from a near standing start a year ago. In its results for the year to the end of March the company also highlighted a step change in its Indian joint venture with JSW Steel, India’s largest steel producer. The partnership, known as JSSL, reported a £134m order book. This compares with Severfield's £295m order book in the UK and Europe (a 63:37 split). Severfield’s Indian order book has quadrupled over the past three years and boasts a higher proportion of commercial work than was the case a year ago, which is expected to cause a rebound in margins following a slip from 9.2 per cent to 6.4 per cent.

The long-term growth potential of India is huge. The country's finished steel consumption is expected to balloon to 230 megatons by 2030-31 from the 90.38 megatons it consumed in 2017-18, according to the India Brand Equity Foundation. A National Steel Policy was implemented in 2017 to encourage this growth, while the abundance of low-cost labour and iron ore resources make the country an attractive place to conduct projects with steel. And JSSL is expanding. Following a £4.2m equity injection by Severfield last year, JSSL's facility in the city of Bellary is increasing capacity from around 60,000 tonnes to around 90,000 tonnes, a development that is expected to complete before the end of the 2020 financial year. True, contributions from JSSL only accounted for 5 per cent of profit last year, but the significance should increase fast.