Taking a view on just how quickly a company can recover from shock losses is one of the most rewarding ways of investing in these markets.
Catching the opportunity of the swift pullback in a company’s share price as it reacts to the latest piece of corporate news enables aware investors to gain some advantage.
Recently, we have seen the market overreact to poor news, taking equities down in the process.
Then, within days, a large part of that response is covered back with share prices rising accordingly.
Effectively fresh analysis replaces previous views and adjusts.
That is exactly what is happening at Severfield (LON:SFR), the £263m-capitalised structural steel group.
Yesterday’s Interim Results to end-September, gave the market a bit of a shock, with the group’s shares almost halving in response, falling from the overnight 87.20p to as low as 47.50p at one stage, before closing at 55.60p.
The Business
Originally founded in 1978 as Severfield-Reeve and listed in 1988, today Severfield is the largest specialist structural steelwork group in the UK and among the biggest in Europe.
The company is the UK’s market-leading group in the design, fabrication, and construction of structural steel, with a total capacity of some 150,000 tonnes of steel per annum.
With seven sites, the group employs around 1,900 people and has expertise in large, complex projects across a broad range of sectors.
The group also has an established presence in the expanding Indian market through its joint venture partnership with JSW Steel, which is India's largest steel producer.
Yesterday’s Interim Results
For the six months to 28th September the group reported a 17% increase in sales at £252.3m (£215.3m), while its underlying pre-tax profit was 14% better at £16.1m (£14.2m), with underlying earnings 14% up at 4.0p (3.5p) per share, together with a an Interim dividend of 1.4p (1.4p) per share.
However, the results also note a non-underlying cost of £20.4m for bridge remedial works programme, excludes potential recoveries from third parties, assessment of any further remedial costs remains ongoing.
It covers some sub-optimal welding on 12 bridges, 9 of which are on the HS2 rail project.
On 1st November the UK and Europe order book was £410m (£460m – July 2024), while the record India order book was £197m (£181m – July).
Management Comment
With yesterday’s Interims Results CEO Alan Dunsmore stated that:
"In the first half of the year, we have delivered further underlying profit growth and have secured some attractive projects which are reflected in our diversified order books.
We continue to see some good projects coming to market however, the predicted recovery in certain sectors has been slower than previously anticipated, and pricing has remained tighter for longer than expected.
In addition, a number of large project opportunities for FY25 and FY26 have been either delayed or cancelled and, given the current market backdrop, we remain vigilant to the increased risk of delay to expected orders in the short-term.
Although the wider market backdrop continues to be challenging, our successful track record and diversified activities give us confidence in delivering the targets we have set for the medium-term.
Looking further ahead, we welcome the new government's budget which established a National Wealth Fund to invest in energy, transport projects and critical national infrastructure.
We have a prominent position in market sectors with strong growth potential and are well-positioned to win projects in markets with positive long-term growth trends, including in support of a low-carbon economy and those which are driving the green energy transition, providing us with a strong platform to fulfill our strategic growth aspirations."
Analyst Views
Alastair Stewart at Progressive Equity Research headlined his note on the group by stating that the ‘short-term headwinds buffet positive outlook’ while commenting that the previously anticipated recovery in some sectors has been slower than expected and that tighter prices are continuing to impact profitability in the short term.
For the current year to end-March 2025 he estimates sales rising to £500.0m (£463.5m) with lower fully adjusted pre-tax profits of £27.0m (£36.5m), easing earnings to 6.9p (8.9p) but maintaining its 3.7p dividend per share.
For next year he sees £515.0m sales, £29.0m profits, 7.6p earnings and an increased dividend to 3.9p per share.
Over at Panmure Liberum its analyst Joe Brent rates the group’s shares as a Buy, although dropping his Target Price from 130p to 105p in reflection of yesterday’s figures.
His estimates for this year are £500.0m sales, £27.0m profits, 6.8p earnings and a 3.7p dividend per share.
For the year to end-March 2026 he looks for £510.0m revenues, £30.0m profits, 7.8p earnings and a 3.9p dividend per share.
Looking further ahead, for 2027, he sees £527.0m turnover, £31.9m pre-tax profits, 8.4p earnings and a healthy dividend of 4.1p per share.
In My View
What a disappointment for this group, but is just knocked back, and definitely not knocked out!
This is why I made those comments at the start of this article – inferring that its shares at the current 56p have good recovery potential, especially if you look at those analyst earnings and yield estimates.
An early bounce back to the 70p range is more than feasible.
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