Severfield looks to capital gains as sector sees optimistic signs

The Thirsk, North Yorkshire-based group, which supplied projects ranging from the London 2012 Olympic Velodrome to The Shard skyscraper in London, said 2010 profits and sales slumped amid “extremely harsh” conditions for the UK construction industry, but added the market shows signs of picking up later this year and next.

“The company anticipates that trading conditions will improve only marginally towards the end of 2011, before a richer vein of opportunities materialises in 2012,” said the group.

Severfield reported underlying pre-tax profits of £15.3m compared with £50.8m a year earlier as high steel prices and fierce competition eroded margins on projects. Revenues dropped 24 per cent to £266.7m.

The group insisted its results were “very creditable in a year of severe trading conditions” – the toughest climate it has seen for decades.

It is recommending a final dividend of 2.5p per share, making a 7.5p total dividend. This is half the payout a year earlier and lower than analysts were expecting.

The company swung from an £11.5m net cash position at the end of 2009 to a £15m net debt position at the end of 2010.

“(Severfield) faces the challenges of 2011 in a determined but pragmatic manner and is now more optimistic of a partial recovery in demand during 2012,” it said.

Shares in the group lifted 19p to close up 8.2 per cent at 251p on its rosier medium-term outlook.

Severfield’s order book stands at £226m, ahead of the £219m at the end of 2009. Its pipeline of projects is “more encouraging” than six months ago – albeit with most projects starting next year.

“It’s not a wider UK construction recovery; it’s very specifically two or three sectors that are key to us that we think are recovering,” said chief executive Tom Haughey.

In particular, the group is beginning to see better prospects in the market for London commercial office blocks. It is currently bidding for three major projects, and was recently awarded three medium-sized projects in the capital.

“It’s positive and encouraging,” said Mr Haughey. “We see some further growth in London commercial in 2012 in particular.”

Smaller Barnsley-based rival Billington Holdings last week revealed plans to enter the London office block market after agreeing a joint venture with Dorset-based Bourne Steel.

Together they hope to win projects worth up to £15m building office blocks up to 30 storeys tall in the capital – contracts which have previously been out of their reach.

However, Mr Haughey said competition for London projects is nothing new, and said he is confident Severfield’s “experience, record, performance and operational attributes” will help the group stand its ground.

Severfield also sees signs of life in the industrial sector, building warehouses and logistics parks for retailers including Tesco, Sainsbury’s, the Co-operative and Amazon. While new energy schemes remain scarce in 2011, Mr Haughey added Severfield hopes to win an increasing number of projects ranging from gas to wind power in 2012. On its target list will be engineering giant Siemens’ new wind turbine factory planned for Hull.

Severfield supplied about 120,000 tonnes of steel in 2010, down from about 150,000 tonnes in 2007. This was amid a market which Mr Haughey estimated has halved since its peak to about 700,000 tonnes in 2010 compared with about 1.4m tonnes in 2007.

The group has virtually doubled market share, and Mr Haughey said the group now has about a 20 per cent market share compared with about 11 per cent in 2007.

This has been aided by rivals being forced to quit or close, he said. In addition, competitors have slashed capacity, in some cases by more than half. Severfield took out about 20 per cent of its capacity in 2009, and now employs about 1,200 staff.

However, the group will not reinstate this capacity this year, and Mr Haughey said it will instead gradually increase numbers in 2012 if the market improves as he expects.

Severfield has frozen salaries in 2011 after reducing them in 2010. Its next wave of cost cutting is focusing on consolidating purchasing and ordering.

With steel prices already having increased 25 per cent so far this year, Mr Haughey said steel now makes up about 40 per cent of the cost of a contract. He expects the prices to “go up a little bit and stabilise”.

Analysts at house brokers Royal Bank of Scotland said: “Trading in the UK was challenging during 2010, however we believe that Severfield-Rowen considerably outperformed its peers in the year.” They said the group’s results were in line with its expectations, with profits slightly ahead.

Evolution Securities analyst Harry Philips said: “The cut in the final dividend to 2.5p compared to our and consensus forecasts of 5p graphically highlights the tough outlook expected in 2011.”

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