Breedon (BREE), formerly known as Breedon Aggregates, has yet to feel the full benefits of last year's acquisition of Hope Construction Materials, but early signs are encouraging. Hope contributed just five months of revenue to Breedon's 2016 results, but the enlarged group still clocked up a 50 per cent jump in pre-tax profit.
- Significant operational gearing
- Huge aggregate reserves
- Infrastructure spending on the rise
- Acquisitions boosting turnover
- No dividend
- Higher imported raw material costs
Earnings momentum is set to continue building thanks to robust trading conditions. And Breedon's high level of "operational gearing". With a relatively fixed cost base, much of any increase in turnover goes straight through to the bottom line. So while revenue in the year to December 2018 is forecast to rise by 6 per cent, the operational gearing effect means pre-tax profit growth is expected to be nearly three times that.
One of the key objectives when the group was formed in 2010 was to try to bring together what remains a highly fragmented sector. In that time, a string of acquisitions costing over £500m has left Breedon with the UK's largest cement plant, two cement import terminals (which came with the recent acquisition of Sherburn Minerals), 26 asphalt plants, 200 ready-mixed concrete plants and over 750m tonnes of mineral reserves. Breedon benefits from this more diversified network of plants and quarries by being closer to customers, which helps cut the high costs associated with shifting its heavy products. On the cement side, four depots are thankfully rail-fed, and last year these achieved their highest ever annual bulk delivery.
Breedon's expansion is all happening at a time when spending on infrastructure is at last set to accelerate significantly, while the housing sector continues to expand as well. And through a mixture of cost synergies and economies of scale underlying operating margins continue to improve, touching 13.1 per cent last year, up from 11.9 per cent a year earlier and well on the way to achieving a 2020 target of 15 per cent.
| BREEDON (BREE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 75.75p | MARKET VALUE: | £1.07bn | |
| TOUCH: | 75.5-76p | 12M HIGH: | 81p | LOW: 55p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 18 | |
| NET ASSET VALUE: | 33p | NET DEBT: | 34% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 270 | 21.0 | 1.5 | nil |
| 2015 | 318 | 35.0 | 2.6 | nil |
| 2016 | 455 | 55.1 | 3.4 | nil |
| 2017* | 665 | 66.5 | 3.7 | nil |
| 2018* | 706 | 78.0 | 4.3 | nil |
| % change | +6 | +17 | +16 | - |
Normal market size: 15,000 Market makers: 10 Beta: 0.47 *Numis forecasts, adjusted PTP and EPS figures | ||||
While a subdued oil services sector has produced some challenges for the Scottish operation, overall recent trading is encouraging and is underpinned by a number of large contracts. Investment in capacity and operational improvements has been running comfortably ahead of depreciation, and several major projects were completed at the Hope cement works last year and the opening of a new cement depot in Dagenham gives Breedon an entry into the builders' merchant market.
There is no dividend payment as management takes the view that shareholders' money can be put to best use by making further acquisitions and investments. While last year's two acquisitions, which came with £155m of borrowings, took Breedon to a £159m year-end net debt position compared with net cash 12 months earlier, a net-debt-to-cash-profit ratio of 1.9 looks comfortable. Also, the recent replacement of a £100m revolving credit facility with a £300m one, which is only half drawn, leaves room for further deals.
