Severfield resilient in 'trough' year for industry

STRUCTURAL steel firm Severfield-Rowen said it continues to win market share amid a tough UK market, which it expects to remain flat into 2011.

The UK's biggest structural steel group, based in Thirsk, North Yorkshire, said a 66 per cent drop in first half pre-tax profits to 8.5m was a "relatively strong" performance and it remains resilient.

Severfield and its competitors are battling through what chief executive Tom Haughey has described as a "trough" year for the industry.

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Recovery in the private sector is counterbalanced by falling public sector demand, he said, with health, education and industrial projects thinning out.

"We are looking that this is about the trough financially," said Mr Haughey. "In terms of demand recovery, we are taking the view that given the public cuts that are forthcoming we are probably on a flatline.

"UK demand recovery will be slower than forecast and it remains unclear whether a revival in private investment will be at sufficient pace to counteract the impact of the forthcoming public expenditure reductions.

"It's a hard one to call and probably easier after (the Government spending review in) October."

However, Severfield sees good opportunities from power, energy, waste and London offices. It is supplying steel to The Shard office block in the City, expected to be Europe's tallest skyscraper, and is also working on the 2012 Olympic stadium in east London.

The group said revenues slumped by 37 per cent to 126.7m in the first six months of the year. Underlying operating margins were 6.7 per cent compared with 12.7 per cent a year ago.

Its order book has fallen just five per cent over the year to 244m.

"Our pipeline is emerging primarily from the private sector," said Mr Haughey. "In London there's probably half a dozen projects on our radar for next year and beyond, which is more encouraging than six months ago."

Severfield added aviation has been strong, with the group winning a contract for Heathrow's Terminal 2. In Leeds, it will work on the recently re-started 650m Trinity Quarter.

Winning more big jobs and moving down the food chain to target some smaller contracts helped the group boost its market share from about 12 per cent in 2008 to between 20 and 23 per cent.

The group predicts a year of "extensive change" in the structural steel industry as rivals fall by the wayside and only the fittest survive. "There are already casualties," said Mr Haughey. "About three of the top 20 firms have already gone or indicated that they are going.

"It's a combination of price levels, losses and demand activity levels."

Severfield said it did not suffer heavily from the coalition Government's decision to axe the Building Schools for the Future programme, as its focus is mainly on larger projects.

But Mr Haughey expects the shrinking education budget to hammer many of its competitors, ultimately leading to an improved supply/demand balance and some margin recovery. "That (BSF) has been the lifeline for many of our medium to smaller competitors," he said.

Analysts on average expect Severfield to report full-year pre-tax profits of 15.5m, on revenues of 288.7m. "We remain concerned that the reduction in public sector projects across the industry will not be offset by a similar pick up in private sector activity next year, impacting both volumes and margins across the market as a whole," said analysts at WH Ireland .

The company, which competes with Barnsley's Billington Holdings, said it would pay an interim dividend of 5p a share, down from 10p a year earlier, but level with its payout at the end of 2009.

It added former Kier chief executive John Dodds is joining as non-executive director in October.

India facility up and running

Severfield-Rowen's structural steel joint venture in Bellary, India, has started its first production.

The joint venture should eventually produce 35,000 tonnes of steel annually when it reaches full capacity.

This will target a 100bn construction market, which is growing at about nine per cent annually.

The group hopes its expertise in high rise schemes, big retail developments and power stations will prove invaluable.

It hopes to achieve sales of 50m in the first year, and has been awarded its first three commercial orders.

"To have brought it to this milestone where we have our first production in the timescale that we have is very pleasing – particularly to do it in the middle of a greenfield site in India," said chief executive Tom Haughey.

He believes in time Indian work could match its UK earnings.

It is a 50/50 joint venture with India's third-largest steelmaker, JSW Steel.