Fears over the future send Severfield's shares towards bargain territory.
Over the past couple of decades, steel structures have been popping up all over the place in the UK -- often at a surprisingly fast rate.
You're driving down a motorway you know well, and glance over a familiar landscape only to see the skeleton of a huge building that didn't exist a few weeks previously.
There's a good chance the steel structure was put together by Thirsk-based Severfield-Rowen (LSE: SFR). The company has put together the necessary structures for landmark building such as Arsenal's Emirates Stadium, Wimbledon's Centre Court and Heathrow's Terminal 5.
It grew quickly from the turn of the century steadily increasing profit and turnover and the share price reflected the company's progress, climbing from around 50p ten years ago, to a peak of over £6 before the fear set in during the autumn of 2007.
Buoyant no more
Since then, of course, it's been a very different story. The construction industry's buoyancy and the banks' readiness to lend have fizzled away. Thankfully, Severfield's steel structures have held up better than its share price.
All things considered, though, Severfield has weathered the storm pretty well, consistently bringing in a decent profit even in the leanest of times.
Last November, I thought the company looked like an excellent long-term investment at 185.5p. Since then, the price touched 250p briefly in June but Wednesday's half year results to the end of June have certainly put paid to any further optimism for the time being. The UK isn't building as many shiny new structures and Severfield is suffering as a result.
The first half's underlying pre-tax profit of £8.2m compares very unfavourably with £24.8m a year earlier, revenue was sharply down at £127m and the dividend has been cut in half to 5p.
Understandably, the market doesn't like the results and the shares have been marked down by over 6% at the time of writing to 197p -- valuing the steel fabricator at £175m.
But there were no huge surprises. The company told us with its final results for 2009 that the current year will be the low point for structural steel demand in the UK and that demand will only grow slowly next year.
What investors need to decide is the extent to which the negative factors are in the price already, and the prospects for the company from this point.
On that score, the company is bullish about its Indian joint venture, JSW Severfield Structures, where production began this month. Severfield tells us that "Indian demand is robust and growing in all sectors".
Meanwhile, the group's overall order book stands at a reasonably healthy £244m, net debt is £8.2m, and net assets of £132m compare well with the market capitalisation, though this figure falls to £56m when intangible assets are deducted.
The brokers anticipate earnings of almost 15p for next year and see the dividend staying steady at 10p for the year -- representing a yield of 5%.
Severfield is understandably cautious about the UK market, and has already said this will be a relative low point -- though it has also identified opportunities in the power, commercial office and infrastructure sectors for 2011 and beyond.
As an acknowledged leader in the world structural steel construction industry and one that sees market improvement just around the corner, I think the company has a great future ahead of it and that the shares are undervalued.
Quite whether a low point has been reached is a matter for personal judgement. But if the company is making steady progress on a "two steps forward, one step back" basis -- the time to buy the shares is immediately after the retrograde step.
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David owns shares in Severfield-Rowen.