Questor share tip: Hill & Smith expects strong second half

The galvanised steel specialist says it expects much stronger second half trading, says Questor

Hill & Smith
513p unch
Questor says HOLD

SHARES in this steady income-generating engineering company look like they have got a bit ahead of the underlying trading for the first six months reported in November. However, they are well worth keeping an eye on in case there is any retreat in the markets.

Hill & Smith manufactures steel products and specialist pipes for water infrastructure projects, as well as high tensile crash barriers for motorways. As such, the company’s fortunes are closely linked to public sector work.

In the first six months ended June revenue was largely flat at £222m, but pre-tax profits fell by 17pc to £15.7m when compared to the same period last year.

The problem was a sharp fall in profitability in the groups utility division. Revenue was flat at £102m during the first six months, but profits slumped to £2.5m from £7.9m in the same period last year. This was driven by delayed decisions on building new gas-fired power stations in the US which need the pipe supports made by Hill & Smith.

Revenue in the roads business also fell 4pc to £56.5m in the first half. The company has so far weathered the cuts well and won additional road work when the government announced new projects in June 2013. The road business is also taking advantage of projects in Australia, Scandinavia and the US. Profit in the road business increased to £5.4m from £2.5m in the comparable period.

The galvanising operations are also struggling to make much headway with revenues largely flat at £63m, and profits steady at £12.3m when compared to last year.

In the interim results the company said it expects a stronger second half and maintained full-year targets of pre-tax profits of £40m. Overall it was a solid performance, but with little growth that means the shares are looking too expensive on 13.5 times forecast earnings. Hold.

Government decisions to outsource defence projects are also taking longer than expected and this could mean earnings take longer to feed through from the order book.

Babcock shares are near record highs trading on 18 times forecast earnings, falling to 16 times next year. That is a premium to sector peers and well above historic averages for the forward P/E ratio of about 12 times. That said, the company should have an exciting 2014 and will benefit from issues at rival Serco, so we retain our recommendation. Buy.