Hill & Smith Holdings PLC (LSE: HILS, Financial) is a London-listed company in the basic resources sector. It has a market capitalization of $1.15 billion and a dividend yield of around 2.6%.
Based on historical ratios, past financial performance and analyst projections of future earnings, the GF value line rates the stock as slightly undervalued. The company also has a strong Piotroski F-Score of 7 and a high Altman Z-Score of 3.8.
The company has three main divisions: Engineering Solutions, Roads and Safety and Galvanizing. Hill & Smith uses a decentralized and autonomous operating business model. Its main markets are the United States and the United Kingdom, where the company should benefit from increased government infrastructure spending.
Hill & Smith provide galvanizing services in the United States and United Kingdom. It is in the process of selling the galvanizing activity in France.
The division provides corrosion protection services in the form of hot dip galvanizing and other coatings for metal products used in infrastructure and industrial applications. Hot-dip galvanizing is believed to have minimal economic and environmental impact, allowing the products to which it is applied to require no long-term maintenance. The division provides services for products found in dock, rural and urban markets.
Between 2020 and 2021, sales increased by 11% at constant exchange rates due to a return of demand and an increase in production volumes. Underlying operating profit increased by 18% over the same period, with the corresponding margin increasing by 0.6 percentage points to 19.9%.
In July, Hill & Smith announced the sale of French Galva SA for a net purchase price of 72.6 million euros ($74.7 million) and this is expected to be completed in the fourth quarter. This leaves the United States and the United Kingdom as the only areas of focus for the division.
Business in the UK saw a significant recovery as deferred projects came online after restrictions were eased; Hill & Smith reiterated its focus on higher-margin, lower-volume businesses at a time when cost increases were needed to offset inflationary pressures. Overall, the UK side saw revenue growth of 17%. Price increases continued in 2022, allowing a margin of 25.3% in the first half.
The United States saw weaker revenue growth in 2021 at 3% due to lower production volumes than in the prior year, as supply-side shortages and steel costs drove up delays in customer projects. US business growth in the first half of 2022 was supported by both volume increases and similar pricing actions.
Galvanizing companies benefit from a broad industry distribution of customers, who operate primarily in the road infrastructure, commercial construction, transportation, agriculture and energy markets. According to Hill & Smith, they expect the galvanizing industry to grow in line with gross domestic product in the UK and above GDP in the US due to the Infrastructure Investment and Jobs Act . The legislation, passed in November 2021, includes $550 billion in new spending over the next decade, providing significant investment for many markets that U.S. galvanizing companies serve.
Roads and safety
The Roads and Security activity provides products both for the construction of road infrastructures and for the securing of large-scale events and areas. The division designs, manufactures and supplies products, such as permanent road safety barriers, temporary work area protection products, hostile vehicle mitigation products, perimeter security products for pedestrian protection, columns street lighting, parking and bridge parapets and technology-assisted traffic signs. The division operates from locations in the United States, United Kingdom, France, Sweden and Australia.
Revenue for the Roads and Safety division in 2021 increased by 8% and profit increased by 43%. Underlying operating margins increased by 2 percentage points to 7% in 2021.
In the UK, the division benefits from the upgrading of the road network as part of the government’s road investment strategy, which required Hill & Smith’s permanent road safety barriers and road safety support structures. The plan has a committed budget of around £25 billion ($30.54 billion) over a five-year period from 2020, of which around 20% is allocated to building smart motorway infrastructure. The division obtained the status of main supplier for the supply of temporary barriers in mid-2021. However, since the beginning of 2022, the deployment of new sections of all-lane motorways has been suspended for five years, with the work started being able to continue.
For the road business in the United States, the company expects to further increase its investments in this area by the end of this year, as higher levels of state and federal infrastructure investment should continue to support the request.
The Engineered Solutions division supplies components to utility providers – they design, manufacture and supply products and services for power generation, liquefied natural gas, renewable energy, utilities, construction and other industries industrial. These include pipe supports, power transmission structures, energy components, liquid storage and water management solutions, industrial flooring and access systems, and products. FRP (fiber reinforced plastic) composites. The division operates from locations in the United States, United Kingdom and India.
The Roads and Safety division is the largest contributor to overall revenue with 40%, with the Engineered Solutions and Galvanizing segments accounting for 32% and 28%. On the other hand, galvanizing business accounts for nearly half of the company’s total profit, indicating the highest labor margin; Engineered Solutions contributed 31% of profit in 2021, while Roads and Security made up the smallest percentage at 23%.
Between 2020 and 2021, the Engineered Solutions division’s revenue increased by 12% and profit by 38%. The strong results were driven by a record performance in the US composites business and a good recovery in the UK for utilities and technical support companies from the effects of the pandemic. The underlying margin increased by 2.1 percentage points to 12% in 2021.
The technical support portion of the business in the United States and India also saw similar growth supported by a strong rebound in the commercial construction industry and increased demand for liquefied natural gas. Businesses in the division managed the impact of higher cost inputs with price increases. The company’s current outlook for the division is positive. The US and UK businesses reported strong organic revenue and profit growth in the first half of the current year, driven by healthy demand from the commercial construction industry, falling steel prices and strong demand from homebuilders. As already noted, the outlook in the US is boosted by confirmed spending through the IIJA.
Growth Opportunities Case Study
Prolectric Services, a subsidiary of Hill & Smith, is an off-grid solar energy solutions provider offering solar lighting, solar generation and solar security products in the UK. In March 2021, Prolectric won a £75 million contract from Balfour Beatty (LSE: BBY, Financial) providing both on-site power and charging for JCB electric excavators as part of a major £355million National Motorway Improvement Program in Hull, a city in Yorkshire. It became the first major site where the ProPower generator was deployed; a new generation of solar hybrid generators.
Hill & Smith seems like a very interesting growth at a reasonable price. Infrastructure spending is increasing and there are opportunities thanks to population growth, urbanization, climate change and decarbonization.
The company is nimble enough to seize opportunities and is driven by its use of sustainable materials and decarbonization strategy for customers. Its cheap rating and strong financial position position it well for the Build Back Better era that we are just beginning.