Profitable infrastructure products innovator Hill & Smith, already enjoying robust growth, is about to benefit from huge government spending packages both at home and in the US, writes James Crux.

With the timing of global economic recovery remaining largely uncertain, investors should still be looking to back profitable, proven growth businesses offering exposure to resilient markets and defensive earnings.

Step forward Hill & Smith, a UK-headquartered group with leading market positions in the design, manufacture and supply of infrastructure products and galvanising services.

A global player – serving customers through facilities in the UK, France, the US, China and Thailand – around 85 per cent of Hill & Smith’s business is exposed to government-backed infrastructure spending. As a result, the group is a likely beneficiary of the enormous fiscal stimulus packages proposed and assembled by Gordon Brown’s government and the Obama administration in the United States.

Led by CEO Derek Muir, who has sharpened the group’s strategic focus and moved Hill & Smith into higher-margin business, the company has established an enviable five-year trading track record, delivered robust growth during a challenging 2008 and is paying down its already manageable debts.

Strategy
Enthusiastic Scotsman Muir, describing himself as ‘all about profits and cash’, says Hill & Smith, under his direction, has continued its strategic evolution from ‘steel metal basher to product provider’. Focused on the delivery of higher-value ‘solutions’ to clients’ problems, Muir’s growth strategy revolves around the strengthening of positions in what are inherently resilient infrastructure markets.

There are three main parts to Hill & Smith, of which the most resilient and robust, infrastructure products, is the largest. Here, it supplies a diverse array of products and services into the defensive road, rail and utility sectors, as well as the security sector, where terrorist threats underpin demand.

The infrastructure product portfolio includes everything from road safety barriers to temporary car parks and ‘variable’ road messaging systems. Further products include plastic drainage pipes and supports, as well as grid components and fencing for the power and energy sector.

Hill & Smith has two smaller operations, both serving construction and infrastructure markets. Galvanising services provides zinc and other coatings for fences, structural steelwork and bridges. Meanwhile, the building and construction products operation supplies roofing systems, lintels and doors and safety handrails used in large infrastructure projects.

Under Muir’s leadership and through investment in innovative products, as well as through certain acquisitions and disposals, Hill & Smith has honed its concentration on its higher-margin operations. Moreover, the group has been successful in diversifying its operations internationally – some 35 per cent of sales and half of the group’s profits now emanate from overseas.

Strategically, Hill & Smith looks exceptionally well placed, since its core markets will reap the benefits of government fiscal stimulus packages in the UK and the US, even though the exact timing of their impact on its financials is uncertain.

Management
Muir is able to call on the experience and sector knowledge of seasoned chairman and non-executive director David Grove, who joined the board back in March 1998. Grove, a shareholder and non-executive director of a number of private manufacturing, distribution and investment ventures, is also non-executive chairman of European floor coverings distributor Headlam.

On the non-executive side, the company can call upon the considerable expertise of Clive Snowdon, best known in quoted company circles as the CEO of strongly performing aerospace supply chain services and composite materials provider UMECO. A man of some influence with a bulging book of contacts, he is also a director of the Midlands Aerospace Association.

Prospects
Released back in March, results for the 2008 calendar year were very strong, showing another period of growth and increases in sales, profits and dividends.

Turnover on continuing businesses grew by 27.5 per cent to almost £420 million, buoyed by acquisitions made in 2007, while underlying pre-tax profits surged ahead by 25 per cent to £38.9 million, all driven by another year of robust sales and profits growth from the infrastructure products business.

Following a year in which a vastly improved £54.2 million (2007: £26.9 million) of cash was generated from operations, the board was able to up the annual dividend by 15 per cent to 10p.
Long-term, Hill & Smith’s prospects are robustly underpinned by essential infrastructure spend on an international scale, with the significant benefits of the various mammoth fiscal stimulus packages expected to flow into the group financials shortly.

The company continues to strengthen its standing in the resilient roads market, where the US offers a huge growth opportunity, with some $27 billion of spend allocated to highways under the Obama economic recovery package.

In the UK roads sector, demand is underpinned by Highways Agency spending on network capacity improvement, which is driving demand for its ‘VARIOGUARD’ temporary safety barriers and its vehicle restraint systems, as well as its variable electronic message systems. Within roads, Muir is also optimistic about prospects for ‘TopDeck’, a new innovative temporary or permanent car park structure, for which installations have been completed at Gatwick Airport and at a BMW dealership in Newcastle. Muir says this product, offering a solution to parking congestion at airports, railway stations and shopping centres, ‘has a great future’.

Prospects in the rail sector have been given a boost by the aforementioned acquisition of Creative Pultrusions, a US-based company able to offer high-strength pultruded products in a glass-reinforced plastic (GRP) material. As well as positioning the business for the ramp-up in rail spend to come from Obama’s economic infrastructure initiatives, the technology brought in-house by the ‘Creative’ deal helped Hill & Smith deliver its first ‘GRP’ railway platform for the new East Midlands Parkway station. Within the utilities market, energy spend, notably in the liquefied natural gas market, is fuelling demand for the group’s pipe supports and storage tanks.

And despite the effect of the downturn on the galvanising services and building and construction products businesses, there are a number of bright spots to encourage investors, with costs having been taken out in both, neatly positioning each division for eventual upturn.

Investors should take comfort from the solid state of the group’s finances. Net debt at the end of the first quarter of 2009 had reduced by £5.4 million from the £146.2 million year-end figure, improving as a result of ongoing good cash generation and favourable exchange rate movements. Net debt, therefore, remains comfortably within the group’s £216 million of banking facilities.

Valuation
From both an earnings and income perspective, shares in Hill & Smith, which have fallen some way from their 377p year’s peak, appear to be significantly undervalued.

Forecasts for 2009 from house broker Arden Partners point to a pre-tax rise from £38.9 million to £41 million, with turnover increasing from £420 million to £443 million. Earnings are expected to rise from 32.2p to 34.6p, with the dividend likely to be lifted to 11p (2008: 10p).

For 2010, investors might expect £43.5 million of profit from sales increased to north of £460 million, producing earnings of 36.9p and a further rise in the annual payout to 12p.

Based upon those metrics, Hill & Smith trades on modest forward multiples of 6.3 and 5.9, a rating that fails to reflect the defensive nature of the group’s earnings, underpinned by public sector spending and fiscal stimulus exposure, as well as the company’s growth potential.

Furthermore, the shares, for which one analyst has set a 300p price target, offer a prospective yield of 5.1 per cent, which increases to 5.6 per cent based on the 2010 dividend estimate.