Stock In Focus: Severfield Promises Growth Despite UK Slowdown

5th Nov '19 by Roland Head

9 comments 2972 reads

One of the joys of running my screen-based Stock in Focus fund over the last 3.5 years is that it’s (mostly) forced me to set aside my prejudices and macro views. I’ve repeatedly bought stocks which the discretionary investor in me wouldn’t have bought. Quite often, I’ve been rewarded with a profit.

This week is a good example. Having ditched the defensive safety of supermarket giant Tesco last week, I’m now preparing to consider the attractions of structural steel small cap Severfield (LON: SFR).

I’ve gained a positive impression of this company over the last few years, but from a cyclical viewpoint I don’t see it as an obvious choice at the moment.

However, this popular stock qualifies for my screen and is potentially eligible for the SIF fund. This week I’m going to take a closer look at this company, which Stockopedia’s algorithms rate very highly:

As usual, I’ll look at Severfield’s quality, value and momentum scores. But first, I think it’s worth taking a look at the firm’s latest trading update. I also want to consider an acquisition which appears to have had a significant impact on broker forecasts.

Trading update warns of H2 weighting

In early September, Severfield issued an AGM trading update confirming that the outlook for the year ending 31 March 2020 remained unchanged. The order book stood at £301m, up slightly from £295m at the start of June.

Management commentary seemed bullish but the update contained one sentence which will strike fear into the hearts of many small cap investors:

“Results for the 2020 financial year are expected to be significantly more second half weighted”

As Paul and Graham often comment, guidance for a second-half weighting is often an early sign that a profit warning is likely.

Checking back to June’s full-year results, I see that the company reported softer UK orders, project delays and difficulties closing sales last year:

The results didn’t mention a second-half weighting, even though September’s trading update claims that this was “as anticipated”.

In the interests of balance, I should point out that there is a plausible explanation for this year’s expected H2 weighting. A recent (paid) broker note on Research Tree notes that an H2 bias to profits is a logical consequence of…

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FREng

5th Nov '19

Thanks for the analysis, Roland. Admirably thorough and objective as usual!

Please will you remind me how to access the breakdown of an individual QVM rank for a company?

turnerpj

Severfield (LON:SFR) The share has performed well over the last 3 months and continues into the last month.

If the 5 day graph is upward I will buy with a 2% St.Loss

abtan

Thanks for the article Roland.

Coincidentally I researched this company a few days ago and agree that the reliance on the UK was enough to make me not want to purchase.

I also don't recall there being a UK/Europe/ROI revenue split, which I found odd and quite unhelpful.

A lot of emphasis is being placed on growth in India, where the company has a JV.
Whilst growth has indeed been impressive over the last couple of years, the fact that the order book there remained relatively flat makes me suspicious that it is perhaps not the golden goose one might think it is.

I also recall reading about an attempt to target smaller customers with lower margins, and that the company was finding this a difficult area to compete in. Very little emphasis was placed on the progress of this venture in the last report. I always appreciate a thorough update, even if it's negative, and the absence of any news here makes me wary.

It's certainly going on my watch list, but if it's going to be a purchase it will be once the performance (growth?) in the UK becomes clearer.

Cheers
A

Roland Head

6th Nov '19

Hi FREng,

The breakdown of the QVM ranks can be accessed from the sector pages on the old version of the site, e.g. https://www.stockopedia.com/sectors/construction-engineering-522010//

Just click on any of the individual ranks and the breakdown will pop up.

I don't think this feature is available on the new Stockopedia site yet.

Regards,

Roland

Hi Abtan,

The revenue split came from the analyst slide presentation issued at the time of the full-year results. This is available on the website - I often find that these presentations add useful detail and 'colour' to the results RNS.

I'm not sure what to make of the Indian venture in terms of profitability - more research would be required, I think. As you say, achieving profitable growth might be harder than it first seems.

Cheers,

Roland

8th Nov '19

Thaks for the explanation. I'm using the new site almost exclusively, so I hope this feature will appear soon!

9th Nov '19

According to the product roadmap (link bottom right), it's still in the backlog:

https://www.stockopedia.com/learn

You can add a vote in favour if it's something you'd like to see. At present, Level 2 data has a lot more votes!

Cheers,

Roland

tadreamsirbaggy

11th Nov '19

The Investers Chronicle rated this as a buy not that many months ago, but I was concerned about the UK reliance. I am interested to hear about there reliance on India, how does one go about finding this level of information and as some says below, the order book is flat.

13th Nov '19

Hi tadreamsirbaggy,

Thanks for your comment. There's some more detailed information about the India order book in the annual results presentation from June:

https://www.severfield.com/wp-content/uploads/2019/06/Full-Year-Results-to-31-March-2019-WEB.pdf

The India order book appears to be growing but the contribution to annual profit from this 50:50 joint venture is still quite small - it was £1.2m last year, versus group profits of c.£20m.

There's also more information in last year's results:

https://www.stockopedia.com/share-prices/severfield-LON:SFR/news/severfield-plc-results-for-the-year-ended-31-march-2019-urn:newsml:reuters.com:20190619:nRSS6744Ca/

and the annual report:

https://www.severfield.com/wp-content/uploads/2019/08/Severfield-AR2019-Index-Linked-PDF.pdf

Regards,

Roland

Stock in Focus: Severfield promises growth despite UK slowdown

Trading update warns of H2 weighting

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Roland Head

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