Jefferies initiated coverage of Hill & Smith on Friday with a ‘buy’ recommendation and 1,750p price target, saying the company has “all the ingredients to re-rate”.
“Hill & Smith has an attractive spread of end markets spanning the general theme of ‘infrastructure investment’,” Jefferies said. The bank’s organic revenue growth forecast of around 6% a year for FY21-FY24 is double the historic trend.
“Fuelling this growth is rising government investment on road networks in the UK (£27bn Road Investment Strategy 2) and US ($135bn within the proposed American Jobs Act).
“Our proprietary Road Investment Model indicates market growth of 4% per annum (FY20 – FY25F) which will support both the Road & Security and Galvanizing divisions.”
Jefferies said the US utilities businesses also look well-placed to benefit from stimulus-driven upgrades to the US electricity grid and secular growth in demand for composites as a more environmentally friendly and more durable alternative to steel and wood.
“We see compelling rationale for using the strong Balance Sheet (FY21F Net Debt:EBITDA 1.2x) to build out each of the three divisions in the US,” Jefferies said.
It noted that many of Hill & Smith’s products and services in the US are immature with low market share but with either regulatory or environmental tailwinds.
“Furthermore, such a strategy should be accretive to group margins, with most US businesses delivering margins above their respective divisional average.”
