MIDAS SHARE TIPS: Steel group Severfield has a sporting chance of doubling profits
For Tottenham Hotspur supporters the new £400million stadium at White Hart Lane will mean more space, better facilities and a ground to suit the football club’s Premier League status. For steel specialist Severfield, the site means business.
Severfield is the UK’s largest structural steel group, renowned for its fabrication and on-site construction work. Chief executive Ian Lawson said in June that he intends to double profits by 2020 and most analysts believe he will do so, possibly ahead of time. The company also expects to pay a steadily rising dividend and there is a strong possibility of special one-off payments to investors over the next few years.
With all these good intentions in mind, the shares, at 77¾p, look cheap.
Winner: Severfield is involved in Spurs’ £400million stadium project
Structural steel is a key component of sports grounds and Severfield is involved in the Anfield redevelopment for Liverpool and the creation of a new roof for Number One Court at Wimbledon.
But the company’s remit spreads to commercial buildings, warehouses, shopping malls, rail terminals, tunnels, bridges and power stations.
Almost every big UK construction project involves structural steel and Severfield plays a key role, particularly when the work is substantial and complex, such as at The Shard in London or the Ordsall Chord transport link in Manchester.
Getting these projects right is complicated. Severfield has four factories and 1,400 staff, who cut sheets of steel to length, drill, weld and paint them – and erect them on site. Lawson’s team has to make sure the work is done properly, on time, and is priced correctly.
Severfield made mistakes in the past. When Lawson arrived late in 2013, the firm had delivered heavy losses and had been forced to raise money in a heavily discounted rights issue. Lawson came from construction group Kier and, since joining, he has focused on improving the way the firm bids for business and delivers the finished goods.
The group returned to the black in 2014, profits were £13.2million in the year to March 2016 and they are expected to rise to £18 million this year and more than £20million in 2018. A dividend of at least 1.7p is forecast for 2017, rising to about 2.2p the year after.
Projects: Severfield is involved in several huge projects, including HS2, the renovation of London Bridge station (pictured) and early discussions on the Hinkley Point power station
Like most construction related firms, Severfield’s fortunes are linked to the economy, which has been growing in recent years. But, even if growth splutters as Brexit gathers pace, Lawson has a few self-help measures up his sleeve. The company is in the middle of an efficiency drive, which should bolster margins over the next four years.
The Government is committed to improving UK infrastructure and Severfield is involved in several huge projects, including HS2, the renovation of London Bridge station and early discussions on the Hinkley Point nuclear power station.
Brexit has also been mildly positive for the group so far. It announced a robust order book of £315million at its interims in November, since when orders have continued to come in. Lawson is also looking at contracts in the Eurozone, as a weak pound enables him to offer competitive prices. Conversely, European steel specialists are less likely to bid for work in the UK, given current exchange rates.
Severfield has a small Indian business too, a joint venture with a local steel maker. The business has been loss-making to date, as India uses concrete for most of its construction. But the division should move into profit in two to three years.
Midas verdict: Severfield is a strong company that is becoming progressively stronger. At 77¾p, the shares should deliver long-term rewards and there is the chance of special dividends, too. Buy.
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