Breedon Aggregates (BREE) is the UK's largest independent aggregates business with 53 quarries, 26 asphalt and 59 ready-mixed concrete plants along with over 500m tonnes of mineral reserves. That means it's in an ideal spot to benefit from a long overdue renaissance in infrastructure spending. In fact, when it released first-half figures for the six months to June, it also hinted that the full-year performance would be ahead of market expectations. There's an added bonus because this expected improvement came despite assumptions that energy prices would start to rise towards the year-end, but so far this hasn't happened.
- Huge mineral resources
- Significant operational gearing
- Highly profitable acquisition policy
- Low energy prices
- No dividend payments
- Higher energy costs could affect margins
Breedon's business model assumes a relatively stable cost base, so that increased output and selling prices have a large impact on the bottom line. Some of this can be seen in the company's first-half performance, where turnover rose by 28 per cent while pre-tax profit nearly doubled. During that time, aggregate sales rose by a quarter to 4.5m tonnes, asphalt sales were up nearly a third to 900,000 tonnes, while ready-mixed concrete sales grew by a third to 400,000 cubic metres. Breedon is also well shielded from new competition. There are extremely high barriers to entry, with licences to open a new quarry virtually unattainable.
However, Breedon continues to capitalise on what remains a highly fragmented sector by making bolt-on acquisitions. First-half results included a full contribution from Huntsman's Quarries and Barr Quarries, both bought last year. Further acquisitions are currently under review. Early trading this year was strong despite the uncertainty generated ahead of the general election and provisional figures from the Office for National Statistics that indicated a decline in construction output. However, these figures were subsequently revised to show that first-quarter output was in fact up 4.4 per cent from the first quarter in the previous year. On top of this, the Minerals Products Association reported significant growth in aggregate volumes.
| BREEDON AGGREGATES (BREE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 52p | MARKET VALUE: | £536m | |
| TOUCH: | 51.5-52p | 12-MONTH HIGH: | 58p | LOW: 40p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 22 | |
| NET ASSET VALUE: | 18p | NET DEBT: | 32% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 174 | 5.5 | 0.6 | nil |
| 2013 | 225 | 12.4 | 1.1 | nil |
| 2014 | 270 | 21.0 | 1.5 | nil |
| 2015* | 328 | 30.0 | 2.2 | nil |
| 2016* | 348 | 33.5 | 2.4 | nil |
| % change | +6 | +12 | +9 | - |
Normal market size: 20,000 Market makers: 9 Beta: 0.52 *Numis Securities forecasts, adjusted PTP and EPS figures | ||||
Breedon has also been busy upgrading existing facilities, boosting output at its largest quarry, Cloud Hill, and adding additional equipment at Huntsman. Nearly £3m has been committed to the former Barr business which has suffered from significant underinvestment, while new asphalt plants were ordered to replace a 40-year-old facility near Inverness. A major application has also been submitted for additional reserves at the Clearwell quarry acquired from Marshalls in 2013. There are no dividend payments, with cash being used to fund further acquisitions and upgrade existing facilities. A number of new contracts were secured in the first half, including supplies for the £750m Aberdeen ring road.
When Breedon Aggregates was formed in 2010, the company set a medium-term target for underlying margin on cash profit of 15 per cent. This was achieved in the first half of this year, and the margin target has now been upgraded to 20 per cent; that's roughly the rate achieved before the economic downturn.
