Investing In US Infrastructure And High-Growth Markets Will Expand Future Margins

Key Takeaways

• U.S. growth drivers and strategic market focus are expected to enhance operating margins and increase Hill & Smith's revenue, especially in resilient sectors.
  
• Active M&A and capital investments aim to strengthen market position, spur revenue growth, and enhance earnings per share through portfolio optimization.
  
• Reliance on U.S. acquisitions and subdued U.K. demand could hamper growth amid integration risks and competitive pressures.

Catalysts

Manufactures and supplies infrastructure products in the United Kingdom, rest of Europe, North America, the Middle East, rest of Asia, and internationally.

• The U.S. market's structural growth drivers are expected to support further operating margin improvements, potentially increasing Hill & Smith's operating margin target from 15% to 18%+. This is likely to positively impact operating profits and return on invested capital.
  
• The company's refreshed focus on high-growth and resilient end markets such as electrical transmission and distribution, water infrastructure, and renewables is expected to drive revenue growth, especially in the U.S., which comprises a significant portion of Hill & Smith's business.
  
• The active M&A strategy, with a yearly target of £50 million to £70 million in bolt-on acquisitions, intends to bolster growth through path-breaking markets and niche areas, directly impacting revenue and EPS.
  
• Planned capital investments totaling around £40 million in 2025, including significant projects like the V&S Utility site upgrade, aim to enhance production capacity and support revenue growth.
  
• Portfolio optimization and disciplined capital allocation, including divestitures of non-core businesses and a focus on high-growth regions, are expected to improve the overall quality of the group's portfolio, supporting cash generation and operating margin expansion.

Hill & Smith Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hill & Smith's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 12.0% in 3 years time.
• Analysts expect earnings to reach £113.5 million (and earnings per share of £1.39) by about April 2028, up from £76.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 17.8x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 9.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Hill & Smith Future Earnings Per Share Growth

Risks

• Ongoing subdued demand in the U.K. and challenges in the U.S. solar lighting business may impact revenue growth, particularly in those segments.
  
• Budgetary pressures in the U.K. public sector create uncertainty and could affect revenue generation and profit margins for the U.K.-focused operations of the company.
  
• Competitive pressure and lower input costs leading to reduced selling prices in certain markets, such as the U.K. galvanizing business, could impact revenue and profit margins.
  
• The company's reliance on acquisitions for growth, particularly in the U.S., could pose integration and execution risks, affecting overall earnings and return on investment.
  
• Trade tensions and potential changes in infrastructure investment priorities, such as the impact of U.S. federal policy shifts, could lead to revenue volatility and impact the company's strategic growth plans in key markets.

Valuation

• The analysts have a consensus price target of £24.493 for Hill & Smith based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £949.4 million, earnings will come to £113.5 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of £16.96, the analyst price target of £24.49 is 30.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.