Hill & Smith Holdings
Price £12.24
52 week high-low £15.34 – £8.44
Net Yield 0.88%
Hist/Pros PER 20 – 21.45
Equity Market Cap (M) £962
Materials
Derek Muir (CEO) and Hannah Nichols (CFO)
Hill & Smith is an industrial engineering firm whose revenue and earnings derive from three core segments; roads and security infrastructure, utilities infrastructure and galvanising services. Geographically, the company operates across seven countries although revenue and profitability heavily derive from operations in the UK and US.
The company has achieved growth over a number of years through a combination of organic and acquisitive growth. Yet, unlike some other businesses the group operates with a decentralised management structure that gives the underlying subsidiaries more independence; Hill & Smith believe this drives a more entrepreneurial culture.
Recently management outlined how this culture is fostering an exciting product development avenue for their composite materials group. Worsening storms across the US are highlighting deficiencies of wooden electricity poles and damaged poles in California are contributing to wildfire issues. Hill & Smith’s composite group are developing a high strength and fire resistant composite utility pole for US utilities to evaluate. Whilst the initial cost outlay for these composite poles will be higher, the lifetime cost and safety benefits could create a new market opportunity.
Like many firms, Hill & Smith has been negatively impacted by the Covid-19 pandemic but results have been buoyed by the ongoing growth and resilience of their US business. If governments begin shifting away from their fiscal austerity mind-set of the post 2008-09 decade then the ageing US infrastructure backdrop could provide a prolonged growth tailwind across Hill & Smith’s infrastructure and galvanising divisions. However, a question for investors to consider is the extent to which Hill & Smith controls its own destiny or relies upon fleeting government budget priorities.
Intuitive Surgical
Price $741.57
52 week high-low $778.83 – $360.50
Net Yield 0.00%
Hist/Pros PER 62 – 79.99
Equity Market Cap (M) $82,476
Healthcare
Phillip Kim (Investor Relations)
Intuitive Surgical is a truly innovative medical technology company: it is the only commercial player in the fast growing soft-tissue robotic assisted surgical market. Its surgical robot - da Vinci - is controlled by a surgeon on a nearby console and allows minimally invasive surgeries to be conducted through a few small incisions, typically 5mm–10mm in diameter. The superior precision and control results in improved surgical outcomes for patients (less scarring, faster recovery, lower remittance etc.) and also lowers total healthcare costs for hospitals.
On conservative assumptions, Intuitive estimate da Vinci has achieved 24% penetration of applicable surgical markets, leaving plenty of room for the business to grow in the long-run. Short-term, however, the Covid-19 pandemic presents a material headwind. It has caused delays to elective surgeries – 50% of the procedures conducted on da Vincis – and perhaps more importantly, has cast uncertainty over the future capital expenditure (capex) decision of hospitals. With 30% of sales coming from da Vinci systems, any change to hospital capex could have a big impact.
So far, system sales have held up better than expected. Intuitive confirmed that support had come from large US orders agreed pre-Covid and from an existing quota with China, which remains only half fulfilled. In the coming quarters, aside from China, demand is highly uncertain. With 70% of the business in the US and the CARES Act only partially covering Covid-19 costs, US hospitals are likely to cut capex. Intuitive have been upfront about this risk to investors, but have also stated they have minimal visibility on the size and timing of these cuts. For investors, the conundrum is whether the valuation of shares (69x December’s estimated earnings) fairly accounts for both the substantial long-term opportunity and highly uncertain near-term outlook.
Pennon
Price £10.03
52 week high-low £12.11 – £7.16
Net Yield 4.23%
Hist/Pros PER 21 – 28.20
Equity Market Cap (M) £4,363
Utilities
Susan Davy (CEO) and Paul Boote (Finance Director)
Pennon is the holding company for the regulated water company South West Water. In July they finalised the sale of Viridor, their waste management and energy recovery business operating across the UK, and announced proceeds of £3.7bn. We spoke with the newly appointed CEO and the Finance Director to discuss how they intend to use these proceeds across four targeted areas.
Firstly, following the sale of Viridor, they plan to realign the capital structure for the Group to ensure that borrowing is at an appropriate level going forward. They intend to pay down £900m of debt to remain within the regulator’s guided range and maintain balance sheet strength despite the current uncertain environment. Secondly, they have made a contribution to their defined benefit pension scheme. They recently closed the scheme to future accruals. However, at the last review in 2019, the pension deficit stood at £45m and they have since paid in £36m to reflect the fact that Viridor was a participating employer and has now left the scheme.
Following their successful acquisition and consolidation of Bournemouth Water, they intend to look for similar growth opportunities within the UK water sector, ensuring any acquisitions are value accretive to shareholders. Finally, they intend to return any remaining cash to shareholders, the extent of which will depend on the scope of any growth opportunities that have arisen over the year.
Having consolidated the business to focus solely on UK water, investors will hope that the half year results in November provide a clearer plan for any acquisitive growth and on the promise of returning cash to shareholders.
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James Ayling, CFA Research Analyst
Michael Bray, CFA Research Analyst
Maude Holloway, Assistant Research Analyst
