Breedon's hidden pile

Breedon Aggregates only came into being in its current form in September 2010. But the core business is actually that of Ennstone - the heavily indebted quarry operation that collapsed in 2009 after a suffering a slump in demand. Specifically, this new operation was formed from the reverse takeover of Breedon Holdings by acquisition vehicle, Marwyn Materials. The new company basically consists of Ennstone's old UK operations - comprising 29 quarries, 19 asphalt and 27 concrete plants in England and Scotland. These are supported with 180m tonnes of mineral reserves - enough to support output at current levels for around 50 years.

The move also created the UK's largest independent aggregates business. And the company boasts some of the sector's best known names - such as chairman Peter Tom, former chairman and chief executive of Aggregate Industries until its acquisition by Swiss construction group Holcim in 2005. There's also chief executive Simon Vivian, formerly of Hanson and former chief executive of Mowlem, as well as finance director Ian Peters, also formerly of Hanson.

That team has two key objectives - to consolidate the UK's 200 or so independent aggregate businesses and to turn around the underperforming Breedon business. The time looks right to begin meeting those objectives. That's because the aggregates sector is currently close to the bottom of the worst downturn for over 20 years - bad for trading, but great for grabbing assets relatively cheaply. And acquisitions make sense given that regulatory hurdles will make it almost impossible to bolster reserves by opening new quarries. Indeed, virtually no new consents of any significance have been granted in the UK for over 25 years - which also means that new rivals won't easily appear. Although supporting acquisitions will mean no dividends for some time.

To finance acquisitions, £50m (gross) was raised through September's share placing and £25m has been retained to fund any planned purchases. The balance has been used to help reduce Ennstone's legacy debt pile - at end-June, the pro-forma debt still stood at £96.2m. True, that's more than Breedon's market value. But the group also boasts plenty of value stored in its aggregate reserves; on a pro-forma basis the group reported property, plant and equipment worth £172m at end-June. Deducting the debt pile from that yields £75.8m, or about 14p a share - not so far behind the current share price. And that takes no account of current assets or value-generating acquisition opportunities.

Admittedly, organic growth for at least this year is likely to be modest as the economy bumps along the bottom and construction activity remains depressed. But a recovery in demand for aggregates will come eventually - suggesting that the longer-term potential is impressive. And it's also worth noting that Breedon has its own operating team. So a contract for asphalt on a road project, for instance - whether new-build or maintenance - will see Breedon supplying the asphalt and laying it.