Polypipe is built to conquer

Growing demand for Polypipe's drainage, plumbing, ventilation and water management products for residential and commercial construction markets saw underlying operating profits grow 17 per cent last year to £46.3m, as margins widened by 1 percentage point to 14.2 per cent. Management attributes the group's sector-high margins - cash profit margins are about double that of its closest peers - to years of investment in broadening the product range, increasing value-added services and improving machinery.

During the recession, efforts were made to strengthen the group's salesforce and technical team to drive up demand and efficiency. Added-value services are considered a key part of the package and Polypipe now boasts an offering that is of unique breadth in the sector, covering design, manufacturing, delivery and technical support to its growing list of happy customers.

Another aspect that sets Polypipe apart from its rivals is its move into water management and carbon-efficient solutions. New products in these spaces give the group exposure to legislation aimed at reducing flood risk and encouraging use of higher-performance ventilation systems, as well as growth areas such as underfloor heating.

Plastic is increasingly viewed as a much more efficient material to use in construction than traditional materials such as copper, concrete and clay, as it is lighter and easier to install, maintain and recycle. As the biggest UK company in the field, and one of the biggest in Europe, too, that's clearly good news for Polypipe's future prospects.

The company isn't overly concerned that competitors will catch up with it either, as it claims Polypipe's 20,000-plus products took years to get approved in a sector with high barriers to entry. The group's extensive sales and distribution channels, meanwhile, also offer a key advantage.

Not so positive, however, is the group's small operation in France, which accounts for 16 per cent of revenue and continues to struggle with the country's fragile economy and rising VAT on property renovation. Management also blamed destocking by distributors for a 6 per cent fall in second-half constant-currency sales there, but is hopeful about government plans to support energy-efficiency improvements.

Net debt is expected to continue falling, having already been reduced by 9 per cent in 2014 to £76.9m. Ending a big cycle of investment, coupled with strong cash flow, means analysts at Numis expect this figure to slide a further third in the current year to £51.3m. Indeed, solid prospects and strong cash generation is expected to drive healthy dividend growth in coming years.