Billington Holdings Shares Fall As Profit Guidance Set to be Missed

Billington Holdings Profit Warning: Shares in structural steel specialist Billington Holdings (LON:BILN) fell today as a new trading update revealed that key contracts had been delayed. And whilst these profits were set to be recognised in the next financial year, it means that this years forecast will not be reached.

Share price action was rather tame: it dumped around 10% on open but since has recovered most of that:

As we can see from this share price graph, the movement in share price has not been all that remarkable. It has traded in a relatively tight range, and really broke out after the 2020 General Election. However, since then Covid-19 has affected it as construction volumes plummeted with lockdowns. This most recent warning puts the share price at a new low against that – also not remarkable as many similar firms also have shown similar price action.

Billington is a small construction company specialising in structural steelwork. These are basically the steel skeletons of commercial buildings, however there are also other uses for these products such as the erection of fencing or even temporary buildings. They also offer safety solutions, which acts as a nice complementary sidekick to their main products. At just £30m market cap, they are very small relative to industry, although other firms such as TClarke (LON:CTO) are not that much bigger.

What did the Billington Holdings profit warning say?

This was short. Referencing the last communication with the market (the interim results on 21 September) it says:

Delays in the construction industry remain well reported and it has now become
evident that the completion of certain key projects will not take place by
year-end, thus impacting the profitability, and to a lesser extent revenue, in
the current financial year. The Board expects the profit associated with these
contracts will now be recognised in the financial year-ending 31 December

This is true enough, although reading that statement the forecast was one of confidence for the outlook subject to delays (which should be a generic term for companies in this field). Effect on profitability is not quantified and suggests no loss, just a timing issue:

As a result, market expectations of the anticipated Group profit before tax
will not now be met for the year ending 31 December 2021. However, the delayed
profit recognition, in combination with the Group’s strong order book and
project pipeline provides greater confidence in meeting current market
expectations for the year to 31 December 2022.

Billington Holdings: The Business

Prior to Covid you could make the case for Billington being a conservatively run company, and a good one at that. The company has been self-funded and carries very little in the way of borrowings. Further, its expansion has not come in the form of shareholder dilution either. Until 2020 these would have been pleasing figures. Turnover and profits had roughly both doubled, indicating a good protection of margins:

A margin of roughly 5% is pretty good for contractors, as many firms bid on work seeking to compete on price. Delving deeper, the safety solutions segment delivers a much needed boost to these figures as it operated on a much higher margin than the steelwork one. Against that, it makes up less than 10% of revenues: this may be hard to upscale.

Another factor is perhaps more than most, Billington has customer concentration. The 2019 accounts revealed that just one contractor accounted for 49% of revenues; obviously a major contract. This can give rise to a degree of volatility in the revenues and also their spread. For instance in 2019, over a third of revenues were derived from Europe. In 2020 this had virtually disappeared and was a main factor in the revenue falls.

The balance sheet here is pleasing. There is a healthy cash balance of £15m at the last report and minimal debts. Further there are no intangible assets at all to speak about, so no capitalised costs or goodwill hanging around on the balance sheet. Until 2020, this was a cash generative business which was did not have high levels of capex and it also did pay a dividend (suspended due to Covid). These have been resumed, but at a much lower level.

This profit warning was short on figures but thankfully we have a brokers note to help us out. Profits for this year drop to £1.1m (from £2.2m), so this not even a loss, so solvency of the business is not even a consideration here – the cash balance provides a massive cushion.

Of more concern is that the next year figures have been left untouched. This is despite the company assurance that profits have simply been delayed and not cancelled. This may indicate some lack of confidence – if this years things can be delayed, why not next years as well?

There are some other shortcomings to this share. The share price run-up did not go unnoticed by the company, but the directors sales have all gone one way:

Notably there has not been a single buy, only sells and some pretty large ones at that. If the directors did not think their company was good value at 300p/400p pre-covid, it seems very unlikely they would think so right now.

Another aspect is the general environment we are in now. This is not pretty for contracting firms especially, as the prices of pretty much everything is rising pretty quickly. Materials, power, labour all increase as well as the risk of lockdown-related delays in some countries. The added levels of bureaucracy may add another aspect of delay and cost to projects – not very friendly if you have to quote a price for works that will be carried out over a much longer period. This has been the bane of many profit warnings before – unforeseen problems leading to reduced profitability on projects.

Is the Billington Holdings profit warning a buying opportunity?

The actual price action here was pretty muted and actually gained some of it back, at one point almost going green on the day. This is pretty unheard of for a profit warning, and can be contrasted to the recent Avon Protection one (which shaved off 50% of the firms value in one day).

However delving a bit into the company shows some good reasons why it did not. Billington have a heavy asset base. There is a good amount of cash and the receivables are most likely from much bigger customers and thus very likely to be paid. There is also not much in the way of debt. Lastly they are still profitable, thus meaning that short of a disaster these assets are not likely to be depleted in the near term. A quick calculation estimates net tangible asset value here at £2.26. If the share price was much under this, in theory you could just wind up the company and be in profit. So this is a reason why I think the bounce came off this level, and if nothing else changes this will act as some kind of support.

Going against it is how to value the business. Some may choose to take out the cash and state that the business is trading at a really cheap multiple (if the 2022 guidance can be met). This is also true, but the structure of this industry is not great for investors. It is entirely possible to have very nasty surprises to the downside, but the reverse never happens to the upside. The best case scenario is much like how Billington were – giving a gradual rise in revenues and no mess-ups. So while price/earnings ratios for these businesses will be low, they are deservingly so, in my opinion.

That does not mean businesses like this can never be good value. In fact at close to NTAV I would be inclined to think it is good value. Despite heavy director selling, the company appears to be well managed with good discipline, and remuneration is not excessive. Not something I would choose to buy myself, but I don’t feel negative on it. 4/5.

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