Investment Column: Severfield profits surge

Severfield-Reeve has achieved the improbable. It has made fabricating steel skeletons for buildings a sexy business. Over the past three years, the company's share price has outperformed the market by over 420 per cent. And yesterday's interim results did not disappoint. Even after losses from the food hygiene side, pre-tax profits for the six months to June rose 116 per cent to pounds 4m on turnover ahead 88 per cent to pounds 52m. Though Rowen, the fabricator bought for a snip last year probably contributed around half the sales, Severfield's original steels business is in fine shape, with output up 36 per cent to record levels.

So what is Severfield's secret? For a start, the company is the UK's biggest player with 16 per cent of the market and no near rival. Its size means it is winning larger and increasingly international contracts with blue-chip players like Siemens - in the period, 27 per cent of core business sales were exports. And as a bigger player it can keep raw material costs low, buying in bulk from British Steel. Moreover, as the strong pound squeezes weaker exporters out, Severfield continues to take share.

Severfield's defining quality, though, is a ruthless attention to efficiency. Compared with the industry average of nine man hours taken to process a tonne of steel, Severfield can do the job in five. John Severs, MD, aims for four.

That is good news for margin prospects at Rowen. New production processes have already raised Rowen's returns from 1.6 per cent at acquisition to 5per cent. As a more specialist, designer fabricator, Rowen's margins may not match group returns of nearly 10 per cent, but there is clearly room for improvement.

The one black spot is lossmaking Manabo, which specialises in chain-mail gloves and knife washers to improve food hygiene. Escalating mad cow costs have, ironically, left customers with no money to spend on upgrading their food hygiene equipment. With legislation enforcing new hygiene standards looking remote, Manabo should be sold.

House broker Hoare Govett forecasts pounds 8m this year and pounds 10.3 for 1998. The shares, down 3p to 491.5p, are on a still tempting prospective rating of 18 this year and 14 times the next.

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