Hill & Smith Holdings PLC (LSE:HILS, Financial) is a London-listed company within the basic resources sector. It has a market cap of $1.15 billion and a dividend yield of around 2.6%.
Based on historical ratios, past financial performance and analysts' projections of future earnings, the GF Value Line rates the stock as modestly 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 primary divisions: Engineered Solutions, Roads and Security and Galvanizing. Hill & Smith utilises a decentralized autonomous operating business model. Its main markets are the U.S. and the U.K., where the company is set to benefit from increased government infrastructure spending.
Galvanizing
Hill & Smith provides galvanizing services in the U.S. and the U.K. It is in the process of disposing of the galvanizing business in France.
The division provides corrosion protection services in the form of hot-dip zinc galvanizing and other coatings for metal products used in infrastructure and industrial applications. Hot-dip zinc galvanizing is purported to have a minimal economic and environmental impact, allowing for the products it is applied on to be maintenance-free over the long term. The division provides services for products that can be found in the dockland, rural and urban markets.
Between 2020 and 2021, revenue increased by 11% on a constant currency basis due to a return in demand and higher production volumes. Underlying operating profit saw an increase of 18% in the same time period, with the corresponding margin increasing 0.6 percentage points to 19.9%.
In July, Hill & Smith announced the disposal of French Galva SA for a net purchase price of 72.6 million euors ($74.7 million) and this is likely to be realized in the fourth quarter. This leaves the U.S. and the U.K. as the sole focus for the division.
The U.K. business saw a significant recovery as deferred projects came online after the easing of restrictions; Hill & Smith reiterated its focus on higher-margin and lower-volume business during a time when cost increases were necessary to offset inflationary pressures. All in all, the U.K. side delivered 17% revenue growth. The price increases continued in 2022, allowing for a 25.3% margin in the first half of the year.
The U.S. saw smaller revenue growth in 2021 at 3% due to lower production volumes than in the previous year as supply-side shortages and steel costs resulted in customer project delays. Growth in the U.S. business during the first half of 2022 was supported by both volume increases and similar pricing actions.
The galvanizing businesses benefit from a wide sectoral spread of clients, which 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 U.K. and above GDP in the U.S. due to the Infrastructure Investment and Jobs Act. The legislation, passed in November 2021, includes $550 billion of new spending over the next decade, providing significant investments for many of the markets the U.S. galvanising business serves.
Roads and security
The Roads and Security business provide products both for road infrastructure construction and to make high-profile events and areas secure. The division designs, manufactures and supplies products such as permanent road safety barriers, temporary work zone protection products, hostile vehicle mitigation products, perimeter security pedestrian protection products, street lighting columns, car park and bridge parapets and technology-supported road message signs. The division operates from sites in the U.S., U.K., France, Sweden and Australia.
Revenue for the Roads and Security division in 2021 grew by 8% and profit grew by 43%. Underlying operating margins increased by 2 percentage points to 7% in 2021.
In the U.K., the division is benefiting from the upgrade of the road network under the government’s Road Investment Strategy, which needed Hill & Smith’s permanent safety barriers and road safe support structures. The plan has a committed budget of around 25 billion pounds ($30.54 billion) over a period of five years starting from 2020, of which roughly 20% is allocated to the construction of smart motorway infrastructure. The division was awarded primary provider status for the provision of temporary barriers back in mid-2021. However, since the start of 2022, the rollout of new stretches of all-lane running motorways has been paused for five years with commenced work allowed to continue.
For the U.S. roads business, the company expects to increase investment in this field further by the end of this year as higher levels of state and federal investment in infrastructure should continue to support demand.
Engineered solutions
The Engineered Solutions division supplies components to utility providers – they design, manufacture and supply products and services for power generation, liquefied natural gas, renewables, utilities, construction and other industrial sectors. These include pipe supports, electricity transmission structures, energy components, liquid storage and water management solutions, industrial flooring and access systems and FRP (fiber-reinforced plastic) composite products. The division operates from sites in the U.S., U.K. and India.
The Roads and Security division is the biggest contributor to overall revenue at 40%, with the Engineered Solutions and Galvanising segments making up 32% and 28%. In contrast, the Galvanising businss makes up nearly half of total profit for the company, indicating the higher margin of work being undertaken; Engineered Solutions contributed 31% of the profit in 2021, while Roads and Security made up the smallest percentage at 23%.
Between 2020 and 2021, revenue for the Engineered Solutions division grew by 12% and profit increased 38%. The strong results were boosted by a record performance in the U.S. composite business and a good recovery in the U.K. for the utilities and engineered supports businesses from the effects of the pandemic. The underlying margin increased by 2.1 percentage points to 12% in 2021.
The engineered supports part of the business in the U.S. and India also saw similar growth supported by a strong rebound in the commercial construction industry and increased demand for liquefied natural gas. The businesses across the division managed the impact of higher cost inputs with price increases. The company's current outlook for the division is positive. Both the U.S. and U.K. businesses achieved strong organic revenue and profit growth in the first half of the current year, driven by healthy demand from the commercial construction industry, steel prices subsiding and strong demand from homebuilders. As already stated, the outlook in the U.S. is boosted by the confirmed spending through the IIJA.
Growth opportunity case study
Prolectric Services, a subsidiary of Hill & Smith, is an off-grid solar energy solutions provider that offers solar lighting, solar generation and solar security products in the U.K. In March 2021, Prolectric won a 75 million-pound contract from Balfour Beatty (LSE:BBY, Financial) providing both on-site power and charging to electric JCB excavators as part of a 355 million-pound National Highways major improvement scheme in Hull, a city in Yorkshire. It became the first major site in which the ProPower generator was deployed; a new generation of solar hybrid generators.
Conclusion
Hill & Smith seems to be a very interesting growth at a reasonable price opportunity. Infrastructure spending is increasing and there are opportunities thanks to increasing population, urbanization, climate change and decarbonization.
The company is nimble enough to seize opporunities and is being driven by its use of sustainable materials and its decarbonization for clients strategy. Its cheap rating and strong financial position leave it well placed for the Build Back Better era we are only just starting.
