Hill & Smith conservatively priced despite best year

Record results kept the Hill & Smith fan club happy Wednesday. They've triggered another round of upgrades at the maker of road safety barriers, street lights and pipe supports, and many in the City believe even these estimates may turn out to be conservative.

HILS, which had already got investors excited with strong third-quarter numbers in November, grew full-year pre-tax profit by 28% to £68 million on revenue up 16%, both records. The dividend also rises by 28% to 26.4p, making a fourteenth consecutive increase in shareholder returns.

"Hill & Smith has delivered its best ever trading performance in 2016 with infrastructure spending in our key UK and US markets remaining strong," cheered chief executive Derek Muir. "Overall, despite political and macro-economic uncertainties, 2017 is again expected to be a year of progress."

Admittedly, translating earnings made in strong US dollars back into weal pounds, HILS's reporting currency, chipped in £27.9 million, or 6% to the top line and £4.4 million to underlying operating profit. But even after stripping out the contribution from acquisitions, of which there were five in 2016, organic growth was 5% and 8%, respectively.

And there's plenty of money being sunk into ageing infrastructure both here and in the US where HILS generates over 80% of revenue and 90% of underlying operating profit.

Talking to Muir is illuminating. He tells us that HILS is in a "real sweet spot both in the US and UK infrastructure markets, with good long term visibility and funding in place".

Expect the galvanising business to keep doing well in the US where HILS is winning lots of smaller, higher margin contracts. Margins have increased sharply at the UK equivalent, too.

And there's big interest in the US where HILS thinks it can profit from Donald Trump's promise to spend $1 trillion (£823 billion) building and repairing roads and bridges. "US infrastructure is crumbling," says Muir, who points out that a big roads project is already under way.

He adds that Trump's threats to American firms are making them think twice about offshoring. Indeed, Muir has already won business with US companies that would typically have gone to China.

Over here, the third year of the Department of Transport's five-year £15 billion 'road investment strategy' will also keep the money flowing to HILS's roads division. While Chancellor Philip Hammond's last spring Budget may not have anything extra for HILS, Muir says there's less talking and more spending now.

HILS has already won contracts to supply temporary barriers, lighting columns, flooring and handrails at the Hinkley Point nuclear power station. It could be worth £20-£30 million over the next few years. Supplying noise barriers for the massive HS2 rail project will also generate big profits.

Analysts are loving HILS right now, especially Thomas Rands and Chris Dyett at Investec Securities. "With momentum in most businesses and the tailwind of potential increases in US infrastructure investment in the medium-term, we see scope for further upgrades as FY17 progresses," they say.

"Our target price increases to 1,425p [from 1,385p] to reflect our EPS upgrades, the passage of time to now include FY18e and a re-rating of our UK peer group."

Look for EPS of 70.9p in 2017, up from 64.6p last year on revenue of £578 million. That puts HILS on a forward price/earnings (PE) ratio of 17, dropping to 16.6 for 2018.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.