Hill & Smith is a div­i­dend growth hero

Dull but prof­itable in­fra­struc­ture project play

Shares - - CONTENTS -

An in­fra­struc­ture en­gi­neer­ing busi­ness might sound about as bor­ing as you get but Hill &

Smith (HILS) is a cap­i­tal growth and in­come re­turns story worth know­ing. The FTSE 250 mem­ber designs, man­u­fac­tures and sup­plies a wide ar­ray of spe­cialised prod­ucts needed when new roads and bridges are built, or when big util­ity projects go up.

Per­haps best-known for its road­side crash bar­ri­ers, you may have seen them hug­ging sharp bends in roads, or along the cen­tral reser­va­tion of mo­tor­ways, for ex­am­ple. Other bits of kit sup­plied in­clude street light­ing, bridge-side fenc­ing and pipe network sup­port struts used by wa­ter com­pa­nies. It also has a gal­vanis­ing busi­ness that pro­vides zinc cor­ro­sion coat­ing pro­tec­tion against rust. This is a company that has roots as deep as pre-Vic­to­rian times, when it was called Hill’s Iron­works. Then it made things like pis­ton rods and wrought iron fenc­ing.

DULL BUT PROF­ITABLE

At first glance Hill & Smith may sound like a low-tech com­mod­ity kit man­u­fac­turer, but that is not the case. Its prod­ucts need to meet strin­gent safety reg­u­la­tions both here and abroad, and that means they are not eas­ily re­placed by cheaper al­ter­na­tives.

About 78% of sales and 86% of un­der­ly­ing op­er­at­ing profit (on 2016 full year re­sults) comes from the UK and North Amer­i­can mar­kets. The Trump ad­min­is­tra­tion’s large in­fra­struc­ture project in­vest­ment plans sug­gests that there is plenty of scope for growth in the US, while Hill & Smith is barely scratch­ing the sur­face of po­ten­tial op­por­tu­ni­ties in places like the Mid­dle East and Asi­aPa­cific.

Which helps ex­plain the company’s long-run ap­peal and

HILL & SMITH CON­TIN­UES TO DE­LIVER A STRONG PER­FOR­MANCE, AGAIN UN­DER­PINNED BY OUR TRIED AND TESTED STRAT­EGY OF IN­TER­NA­TIONAL DI­VER­SITY TO­GETHER WITH THE LEAD­ING PO­SI­TIONS OUR BUSI­NESSES HOLD IN THEIR RE­SPEC­TIVE MAR­KETS

– DEREK MUIR, CHIEF EX­EC­U­TIVE OF­FI­CER

re­cent record-break­ing op­er­at­ing per­for­mance met­rics.

Fig­ures for the half year to 30 June 2017 show rev­enue of £291.8m for the six months com­pared to £259.3m for the same pe­riod a year ago. Op­er­at­ing and pre-tax profit jumped 67% and 73% re­spec­tively, although the un­der­ly­ing growth (strip­ping out one-offs and cur­rency im­pacts) came in at 21% and 22% apiece, to £38.8m and £37.4m re­spec­tively.

The bal­ance sheet is also strong. Un­der­ly­ing op­er­at­ing profit cov­ered net un­der­ly­ing fi­nance costs 27.7-times, ac­cord­ing to the company, while net debt of £109.1m is cov­ered nearly 2.3-times by net as­sets.

And, while cash thrown off by op­er­a­tions de­clined from £25.6m to £18.7m, first half on first half, it com­fort­ably cov­ered the £10.6m of tax and in­ter­est pay­ments for the pe­riod. That made £6.7m in div­i­dend pay­ments af­ford­able too.

EN­VI­ABLE IN­COME

The pay­out is im­por­tant. True, the 2.2% yield based on a fore­cast 28.5p div­i­dend for 2017 may not stand out. This is partly down to the strong share price rally over the past 18-months or so, as in­vestors piled in on sup­pli­ers ex­posed to big in­fra­struc­ture spend­ing, par­tic­u­larly in the US.

The un­der­ly­ing in­come at­trac­tion here is the growth rate of the div­i­dend. Hill & Smith has in­creased its pay­out ev­ery year since 2002, typ­i­cally in the high sin­gle-dig­its or better. The first half div­i­dend was hiked 11% to 9.4p, which may im­ply an­a­lyst as­sump­tions for the full year pay­out of 28.5p to 29p per share may be pitched a lit­tle on the low side.

MAN­AG­ING THE CY­CLE

Per­haps the big­gest threat to the company is cycli­cal­ity. The company can clearly trade well dur­ing pe­ri­ods when na­tional gov­ern­ments are will­ing to bankroll large in­fra­struc­ture projects but what hap­pens when the public purse strings are tight­ened?

No­tably, 2009 full year re­sults, which re­flect a lot of the fall­out from the global fi­nan­cial cri­sis, do show sin­gledigit de­clines in rev­enue and flat un­der­ly­ing op­er­at­ing profit. But pre-tax profit rose and the div­i­dend jumped 15%. This sug­gests that man­age­ment know how to man­age their way through dif­fi­cult end mar­kets, stream­lin­ing op­er­a­tions and cut­ting costs to meet a challenging eco­nomic back­drop.

There is lit­tle ev­i­dence of stiff­en­ing end mar­kets for now, not­with­stand­ing the cur­rent un­knowns around Brexit ne­go­ti­a­tions. At the cur­rent £12.88, the stock is trad­ing on a price to earn­ings (PE) mul­ti­ple of 17.3 based on In­vestec’s 74.6p of earn­ings per share next year. That may not look a scream­ing bar­gain but it com­pares favourably with the 18.9 for­ward PE of Hill & Smith’s peer group, ac­cord­ing to Reuters Eikon data.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.