Canny acquisitions, self-help and improving conditions in the construction market are leading to predictions of explosive earnings growth at heavy materials sector consolidator Breedon Aggregates (BREE).
- Geared to economic recovery
- More acquisitions likely
- Huge aggregate reserves
- Strong barriers to entry
- No dividend
- OFT investigation on Scottish acquisitions
Breedon is the largest independent aggregates business in the UK, owning 37 quarries, 22 asphalt plants and 48 concrete batching plants in England and Scotland. Total mineral reserves now stand at nearly 400m tonnes, which is enough to keep it going for 76 years at current output levels. Crucially, these outlets are dotted all around the country, which is a major competitive advantage because delivering aggregate any great distance is an expensive business. And supply is severely restricted as no significant licences for new quarries have been issued for at least 25 years.
It has always been the objective of Breedon's management to grow the company by consolidating the largely fragmented aggregates industry through acquisitions. There had been hopes of making a large purchase of assets that were put up for sale as a condition of the merger between Lafarge and Tarmac. However, the price was not quite right, and Breedon had the courage to walk away.
Waiting to buy bottom-of-the-cycle assets at the right price has proved a shrewd move. Breedon made two acquisitions in May for a total of £51.5m. These comprised four quarries and an option on a fifth from landscape group Marshalls and 11 quarries, 7 ready-mix plants, four asphalt plants and two concrete block facilities from Aggregate Industries - now part of Holcim. The two acquisitions were paid for through a placing of 290.4m shares, which raised a net £58.7m.
| BREEDON AGGREGATES (BREE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 29p | MARKET VALUE: | £275m | |
| TOUCH: | 28.75-29.5p | 12M HIGH: | 30p | LOW: 19.6p |
| FWD DIVIDEND YIELD: | NIL | FWD PE RATIO: | 19 | |
| NET ASSET VALUE: | 15p | NET DEBT: | 51% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 42.7 | -1.85 | -0.58 | nil |
| 2011 | 169 | 1.50 | 0.21 | nil |
| 2012 | 174 | 5.60 | 0.67 | nil |
| 2013* | 218 | 9.30 | 0.80 | nil |
| 2014* | 246 | 18.2 | 1.50 | nil |
| % change | +13 | +96 | +88 | - |
Normal market size: 10,000 Market makers: 7 Beta: 0.26 *Peel Hunt estimates, underlying PBT and EPS figures | ||||
The Scottish acquisition caught the eye of the Office of Fair Trading, but analysts at Cenkos reckon the worst-case scenario would entail the disposal of a quarry in Aberdeen and two or three ready-mix plants, which could result in some form of writedown if Breedon became a forced seller. On the plus side, though, management has really proved its credentials as a canny purchaser with its two deals. Broker Peel Hunt marked up its earnings estimates by a hearty 11 per cent for 2014 and 12 per cent for 2015 on the back of the acquisitions. What's more, the strengthening balance sheet (Peel Hunt predicts net debt will be below £30m by 2015) means there is the potential for more earnings-enhancing acquisitions in the future.
The real cherry on the cake for Breedon, though, will be a recovery in the construction market. A recovery should bring the double whammy of improving volumes and prices and, due to a largely fixed cost base, this could send profits soaring. Peel Hunt estimates that between 30 and 60 per cent of revenue will drop through to cash profits, depending on the product mix. And prospects for the construction market look good, with the most recent government spending review outlining a pipeline of infrastructure investments worth £100bn between 2015 and 2020. Meanwhile, in Scotland work on the £750m Aberdeen ring road is expected to start early next year, and a £3bn upgrade of the A9 is planned over the next 12 years.
