Investment Column: Time for Severfield-Rowen investors to sell

SIG; Monitise
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Our view: Sell

Share price: 202p (-8p)

It is a difficult time to be a structural steel supplier, and Severfield-Rowen's results gave ample proof of this yesterday. Figures for the six months to the end of June showed its revenues down by 37 per cent to £127m, profits after tax a whopping 75 per cent lower and underlying operating margin down by six percentage points to 6.7 per cent. Most telling of all, the group's order book stood at £244m, compared with £256m in June last year.

The numbers may be horrible but are not surprising given the state of the economy. Severfield-Rowen described its performance as "relatively strong" given the economic conditions, stressing that it had doubled its share of the UK market thanks to a sting of orders including work at Heathrow's Terminal 2, the Velodrome in Glasgow and Park House in London.

It also pointed to opportunities in the Middle East and India, saying that the next 12 months, while remaining sluggish in the UK, would also see "substantial rationalisation" in the steel sector, which should improve margins.

"The pronounced falls in revenue and margins are as anticipated by the company and reflect the significant fall in UK demand for structural steelwork," said the chief executive, Tom Haughey. "The group is continuously reviewing its UK operational cost base in light of key supply and demand balances and forecasts. It is optimistic that its forward strategies for the UK and overseas will stimulate growth in shareholder value."

Severfield-Rowen, headquartered on a former RAF airfield at Dalton, North Yorkshire, has a lot going for it. It has shown its quality by growing its market share recently but even that cannot detract from the fact that public-sector projects face cuts and private-sector activity is not expected to pick up in time to take the strain.

With a price-to-earnings ratio of 18.2 times, according to estimates from WH Ireland Securities, the stock is already looking overpriced. Now is the time to sell.


Our view: Hold

Share price: 93p (+2.3p)

Market mood swings can knock the strongest of stocks. Fearful traders think little of pressing the sell button, no matter how sparkling the fundamentals (by the same token, bouts of optimism are liable to trigger rallies in the weakest of companies).

We bring this up because SIG, the insulation and roofing group, issued its interim results yesterday and reported that trading conditions had improved gradually in recent months. Moreover, SIG boasts some strong fundamentals. Demand for insulation, for instance, is set to rise as governments seeks ways to encourage more efficient uses of energy. Beyond that, management has worked hard to keep SIG on a sound financial footing, leaving it well placed to capitalise in a recovering market.

Weighing against these positives is the fact that the wider picture remains clouded. A recent warning from the Irish building materials group CRH did little to help sentiment around companies exposed to the construction sector. The fact that CRH's caution was prompted mostly by weakness in the US, a market to which SIG is not exposed, did not stop a sell-off of the latter's shares. SIG, which trades on multiples of about 13 times forecast earnings for the full year, bounced back last night, but Tuesday's decline served only to highlight the often pivotal role played by market sentiment.

We like the company and we are confident about its prospects, but fear that the stock will struggle to perform until there is more clarity about the broader macro-economic outlook, particularly in the UK and Europe, where SIG operates. Hold for now.


Our view: Buy

Share price: 20.5p (-1.25p)

While few punters may have heard of the mobile banking and payments provider Monitise, those who bank on the go may well have used its products. The company developed applications for customers of NatWest and Lloyds, which allows them to check their finances through their smartphones.

This is undoubtedly a growth area and yesterday Monitise said revenues had risen by 125 per cent in the year to 30 June. Although its losses widened after one-off charges, it is adding 100,000 new customers a month and the potential for growth is huge.

Monitise has a big deal to develop Visa's mobile operations, with a mobile app about to launch in the US. It is also expanding into India after launching a joint venture with Visa last month. Analysts at Piper Jaffray said: "Given the size of the Visa card base, this revenue opportunity is significant."

Its recent £31m fund-raising was well backed and in the build-up to an expected profit in 2013, there should be value in the shares, so buy.