Hill & Smith Holdings (HILS)

Great British Business: Manufacturing and Engineering

Engineers promised road spending bonanza

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Engineers promised road spending bonanza
It's only a few weeks before George Osborne delivers his Autumn Statement, and already the interested parties are making their case for a slice of the pie. Among them is the EEF, the association for engineering and manufacturing companies. It argues that a "massive" boost to infrastructure and innovation is needed to keep driving growth and rebalance the economy.

"We have seen a significant turnaround in the economy over the last year, and it is important for the government to maintain its focus on areas which drive growth, including maintaining a competitive tax regime and other measures which support high value investment and innovation," says EEF chief executive, Terry Scuoler.

"Despite the forthcoming election government must continue to drive forward with policies which support long term growth and the re-balancing of our economy. Manufacturers are also heavily reliant on road networks. Implementation of those projects left on the too difficult list for too long is an urgent priority."

In October, an EEF survey of members revealed that more than a third thought Britain's road network to be "poor" or "very poor," while two-thirds said investment in the strategic road network should be government's main priority (see chart below).

That's why EEF chief economist Lee Hopely is calling for politicians to free up cash for road projects parked on the hard shoulder for years.

"We need implementation plans for infrastructure projects currently at the scoping stage, including upgrades to the A303, A14, A590 and A1," writes Hopely. "Government should also set out a timetable for tackling the rapidly escalating £12 billion local road maintenance backlog and reform of the Highways Agency to guarantee the promised three-fold increase in road investment."

Of course, there is already money set aside for getting our roads into shape, lots of it. Through its Road Investment Strategy (RIS), the government agreed last year to triple investment in roads from £1 billion a year to £3 billion a year by 2020.

In his recent speech to business leaders at the Confederation of British Industry's (CBI) conference, prime minister David Cameron promised "nothing less than a roads revolution," designed to deliver quicker journey times, more jobs, and businesses boosted right across the country. He said:

In three weeks' time you will see an Autumn Statement where we choose the future again. At its heart is the biggest, boldest and most far reaching road improvement programme in four decades: over 100 improvements to our major roads. Hundreds of extra lane miles on our motorways and trunk roads. The green light given to major projects that have been stalled for years. Action to improve some of the most important arteries in our country - like the A303 and the A1 - which for too long have held parts of our country back. And all underpinned by over £15 billion worth of investment.

So which companies will see that cash? Well, Hill & Smith (HILS), the maker of crash barriers and road-safety signs, stands out. It's certainly optimistic and its share price is not far off a record high, too.

It said recently that business is going well and that it was on track to meet full-year expectations. In fact, Hill & Smith is so confident in the roads division that it has invested £15.5 million adding a further 95,000km, or over 50%, to its fleet of temporary road barriers, taking the total to 265,000km.

"This is a good lead indicator and hardware sales (barriers, message signs etc) should follow," reckons Numis Securities. "With the shares still trading at a discount to the broader engineering sector, further upside potential remains."

According to the broker, Hill & Smith will generate revenue of £455 million in 2014, rising to £469 million next year, of which about £50 million is down to UK government spend, mainly on roads. But the Coalition's promise to double spending on new road lanes over the next five years is in Hill & Smith's sweet spot and will clearly be a big money-spinner going forward.

True, 2015 is election year and politicians pre-occupied with wooing voters have been known to let spending programmes slip. Adjusting spending priorities is possible, too. But if what's been said is a true reflection of the outcome, the future looks bright.

"Provided that the government delivers on its promises, by no means a foregone conclusion, we estimate that H&S's road business should grow by at least 15% per annum for the next five years," says Numis. If that helps accelerate earnings growth into the high single-digits, as predicted, the current valuation gap to UK engineering peers should narrow.


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