Structural steel company Severfield (LSE: SFR) released a pleasing set of full-year results on 14 June and the shares rose around 8% on the day.
However, there may be more to come for shareholders because the figures are robust and the outlook is encouraging. Meanwhile, the valuation remains undemanding for the time being.
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Profits shoot higher
The company said profits for the trading year to 25 March came in ahead of the directors’ prior expectations. And on top of that, there’s a “high-quality” order book.
The directors think the post-period acquisition of a Dutch steel company called Voortman should help to accelerate the firm’s European growth strategy.
Revenue rose by 22% compared to the prior year. And that drove an increase in underlying earnings per share of 18%.
The progress shows up in the cash account as well. During the period, the business moved from having net debt of just over £18m to a net cash position on the balance sheet of just under £3m.
The directors rewarded shareholders by slapping an extra 10% on the total dividend for the year.
A positive outlook
Looking ahead, the directors see a “significant” pipeline of opportunities in the UK and continental Europe. And many of the firm’s markets have a “favourable” outlook.
The Voortman acquisition should be earnings enhancing during 2024.
Meanwhile, in India there are post-pandemic growth opportunities. The directors pointed to a “very encouraging” outlook for the Indian economy with “strong” underlying demand for structural steel.
Chief executive Alan Dunsmore, acknowledged the uncertain macroeconomic environment generally. But the company is “confident” of delivering further trading and financial progress in 2024.
This report showcases robust trading and a positive outlook. So, it’s perhaps no surprise to see the stock move higher on the day. And to put the move in perspective, at around 64p, it’s about 7% down over the past year.
And that suggests a period of consolidation in the business and the stock, which I see as positive. With the shares moving essentially sideways, the business had an opportunity to build value.
The current valuation looks undemanding with the dividend yield above 5% and the earnings multiple in the ballpark of about eight.
Challenged by cyclicality
However, I’m not expecting a valuation up-rating to drive this stock. The business is highly cyclical and probably doesn’t deserve a higher multiple. And that cyclicality adds extra risks for the investor with a focus on the long term. A glance at the longer-term chart emphasises the dangers here.
Nevertheless, as general economic recovery hopefully gathers pace around the world, I see Severfield as being well-placed to benefit. And rising profits may drive the shares higher even if the valuation remains modest.
Indeed, some cyclical businesses can end up looking like fast-growth companies over several years when the business cycle is moving up.
So, I’d be inclined to dig into this stock opportunity now with further and deeper research. And I’d consider adding the stock to a portfolio of diversified positions. However, once in, I’d keep an eye on it!
