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Questor: a good ‘safe haven’ as the storm rages – buy Hill & Smith if the price weakens
Questor share tip: one fund manager who regards damage from the coronavirus crisis as unquantifiable still has his eye on this stock
Prices of London-listed stocks may have collapsed in recent days but not every professional investor is rushing to buy.
Instead, some are being very selective about what they add to their portfolios, even at what appear to be knock-down prices, because they say it’s impossible to judge the impact of the coronavirus crisis on many companies.
“I don’t expect a rapid ‘V-shaped’ recovery from this,” said Stuart Widdowson, who runs the Odyssean investment trust. “It’s true that many Chinese factories have gone back to work so there may not be a shock to the supply of goods from there, but in the West there is the possibility of a double shock to both supply and demand as people stay away from work and stop spending.”
As a result there will be “disruption in many sectors”, he added. “Even a defensive stock, let’s say a software company that has high recurring revenues, may be unable to go out and see customers, for example,” he said. “There are indirect risks with this crisis, so we are being cautious. The trust has plenty of cash at the moment but I don’t feel like jumping back into the market wholesale.”
However, Mr Widdowson is still on the lookout for opportunities and said one stock that had sparked his interest was Hill & Smith, which supplies certain infrastructure markets.
It operates in a variety of related niches, including the galvanising of metal products for other businesses and the supply of galvanised road barriers and other “street furniture”.
“Galvanising customers’ products is a profitable business in Britain but it’s even better in America,” Mr Widdowson said. “This is because it’s economic only within about a 60-mile radius of the customer and in parts of the country you won’t have two galvanising firms within 60 miles. The result is limited competition, which is also the case in the street furniture market.
“There is a big opportunity in buying up small suppliers in what are fragmented sectors and making them more efficient. Margins in these businesses in America are very high.”
Hill & Smith not only makes galvanised road barriers but has a business that rents them out while roadworks are in progress. “This is a very profitable operation,” the fund manager said. “When the Government was preparing for Brexit last year and had contingency plans to turn the M20 into a lorry park, it called Hill & Smith about the barriers it would need as it’s probably the only British firm that could supply them.”
He said this side of the business was broadly immune from the broader economic picture, including the coronavirus crisis, because the Government was likely to spend more on infrastructure such as roads in any event, “especially in the North”.
“The firm’s earnings record is not that correlated to the economic cycle,” he added. “It has been a stellar performer. Since 2006 it has failed to increase its profits only once, in 2011, even though the industrial sector was hammered in the financial crisis.
“It’s a business I’ve known for a long time – it’s a ‘serial compounder’ of profits and is extremely good at both capital allocation and making a success of acquisitions. It generates plenty of cash and is very well run.”
Odyssean bought a small stake in the firm about two years ago when the shares changed hands for about £10 and Mr Widdowson said at the current price of more than £13 they were only worth holding.
“But we are watching it closely and would be extremely interested in increasing our holding if the price were to weaken in a further bout of selling,” he added. “The price-to-earnings ratio is a little above its long-term average but the quality of the firm’s management, the strength of its balance sheet and the defensive nature of the drivers of its future growth should make it a good safe haven.”
Questor says: buy on weakness
Ticker: HILS
Share price at close: £13.10
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