Breedon's hidden value

Management is focusing on growth through acquisitions in what is a highly fragmented industry. This strategy is helping to broaden Breedon's geographical presence, which is very important because hauling aggregate over any considerable distance is very expensive. Acquisition is also one of the few growth opportunities available to it, as no new quarries have been opened for at least 25 years, which also provides high barriers to entry for competitors. Broker Numis Securities expects cash profits to have doubled between 2011 and the end of 2014, and acquisitions will have accounted for 55 per cent of that growth.

Only last month Breedon acquired a 50 per cent stake in HV Bowen, the owner and operator of Tan-Y-Foel quarry, which contains rare, skid-resistant 'polished stone value' aggregates that are in hot demand for heavy traffic roads. Earlier acquisitions include quarries from Marshalls (MSLH) and the former Aggregate Industries (AI), completed last year. Cost savings from integrating the AI acquisition should now start coming though following delays caused by a lengthy Competition & Markets Authority investigation.

There should be plenty more acquisition opportunities on the horizon, too, including assets likely to be sold off as a result of a merger between cement makers Holcim and Lafarge. And Breedon is in a good position to finance further deals after signing a new four-year £100m revolving credit facility, which includes an option on an additional £50m. The new facility means the existing agreement maturing in 2015 can be cancelled, while the new facility was secured at a lower cost. Further large purchases could be funded by share issues.

But Breedon has plenty of growth potential beyond acquisitions. Of the 45 per cent of growth between 2011 and 2014 that Numis estimates to be organic, the broker says most came from management action rather than market recovery. With volumes and prices looking set to rise, and the cost of digging up and transporting aggregate broadly fixed, profits could stand to benefit significantly.

Clearly, the market is already pricing in some of this growth potential, with the shares trading at 38 times historic earnings. But there is plenty of scope for the company to beat earnings growth forecasts - and even on current estimates the earnings multiple drops to 32 times for the end of this year and 26 times for the end of 2015. There is no dividend payment at the moment, which is not surprising given the role of cash generation and credit facilities in expanding the business.