Breedon Aggregates has three big things going for it: 20 hard-stone quarries, sand and gravel pits, asphalt and ready-mixed concrete plants, which together provide aggregate reserves of 200m tonnes; the opportunity to grow quickly via acquisition; and, crucially, highly experienced bosses.
- The opportunity to grow quickly by acquisition
- Hugely experienced bosses
- Already has aggregates reserves
- Strong barriers to entry
- No dividends for some years
- Carries a lot of debt
Its line up of top management would be impressive even for a big building materials outfit. Chairman Peter Tom, who at the age of 72 shows no signs of slowing down, joined a modest regional aggregates outfit called Bardon straight from school in 1956; by 1977 he was the chief executive and ultimately he turned it into Aggregate Industries, which was acquired by Swiss cement maker Holcim in 2005 for £1.8bn.
Mr Tom was soon starting elsewhere. He reversed a shell company, Marwyn Materials, into Breedon in September 2010 when it acquired the English and Scottish assets of Ennstone, a quarrying operation that disappeared in a mountain of debt and collapsing US markets in 2009. Also on Breedon's board is chief executive Simon Vivian, who was chief executive of construction group Mowlem, having previously run Hanson's European building materials business. Finance director Ian Peters also hails from Hanson.
Breedon's aim is to consolidate still further the UK's aggregates industry and it has already made a couple of bolt-on acquisitions. But the transformational change could come as a result of the merger of two giants, Tarmac and Lafarge. Unusually, the Competition Commission insists that Tarmac and Lafarge must make disposals before the merger can take place. This is likely to narrow the field of potential buyers and make it more likely that the disposals will be made in one lump.
| Breedon Aggregates (BREE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 21p | MARKET VALUE: | £135m | |
| TOUCH: | 20.5-21p | 12-MONTH HIGH: | 25p | LOW: 16p |
| DIVIDEND YIELD: | NIL | PE RATIO: | 12 | |
| NET ASSET VALUE: | 9p | NET DEBT: | 163% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 43 | -6.30 | -2.19 | nil |
| 2011 | 169 | 1.39 | 0.21 | nil |
| 2012* | 184 | 4.13 | 0.60 | nil |
| 2013* | 198 | 7.87 | 0.99 | nil |
| 2014* | 216 | 12.43 | 1.69 | nil |
| % change | +9 | +58 | +71 | – |
Normal market size: 8,000 Market makers: 6 Beta: 0.1 *Peel Hunt estimates | ||||
What's up for sale is essentially a cement, aggregates and ready-mix business with around 11 per cent of the UK market share. The rational behind the forced sale is compelling: five major players, including Tarmac and Lafarge, currently control 90 per cent of UK cement production as well as 70 per cent of aggregates, ready-mixed concrete and asphalt. So the other major players won't be able to bid. That leaves Breedon, whose market share is a titchy 2.5 per cent, as an ideal candidate. Most of the assets acquired could be used in-house - cement for ready-mix concrete, for example - and broker Peel Hunt reckons that incremental sales could be as much as £300m, generating cash profits of £32m.
Set against this is the cost of acquisition, estimated at up to £300m against Breedon's current stock-market value of around £135m. Raising sufficient funds could only come through a heavy issue of new shares.
Of course, it's possible that none of this comes about. If so, it still leaves Breedon with huge assets and a management that has already turned round the former Ennstone into a profitable business. Besides, in Breedon's line of work the barriers to entry are considerable. True, setting up a ready-mix plant, for example, is easy enough, but ensuring a supply of raw materials close by would be harder, especially as planning consent for new quarries in the UK is virtually unheard of.
Breedon's bosses have also warned that trading profits will be used to generate growth, so there is little prospect of a dividend soon, especially as the group already carries plenty of debt – around £96m against shareholder funds of £59m.
