- First half cash profit up six per cent on revenue of £248mn
- Interim earnings per share (EPS) rises 35 per cent to 3.6p, or more than half analysts’ full-year 6.7p estimate
SigmaRoc (SRC:62p), a group that is pursuing a buy-and-build strategy in the heavy building materials sector, has released a robust pre-close first half trading update and one that suggests this year’s share price de-rating is significantly overdone.
Importantly, the group has been successful in passing through higher costs to customers and reports good demand across the majority of its end markets (housing, infrastructure and industrial). Cash profit margin of 19.3 per cent was in line with analysts’ 19 per cent forecast for the full-year, and well ahead of the 17.9 per cent margin reported in the first half of 2021. Cash profit of £48mn is exactly half Peel Hunt’s full-year estimate of £96.7mn, up from £49.3mn in 2021, the bumper growth reflecting the contribution from acquisitions, the largest of which was last summer’s purchase of limestone and lime products company Nordkalk from privately-owned Rettig Group.
Nearly 95 per cent of Nordkalk’s annual revenue comes from Poland, Finland and Sweden, thus diversifying SigmaRoc’s southern European revenue base while offering scope to expand Nordkalk’s geographic footprint through bolt-on acquisitions. Admittedly, a sizeable strike at a key customer in Finland impacted Nordalk, but not enough to stop SigmaRoc reporting 35 per cent higher EPS of 3.6p. That is more than half Peel Hunt’s 6.7p annual estimate even though the group has a second half weighting in terms of revenue and profit. Importantly, strong cash generation is being enhanced by ongoing operational improvements, and balance sheet leverage (net debt to underlying cash profit) of 2.2 times is well within the group’s 3.5 times limit.
True, Russia’s invasion of Ukraine has created greater geopolitical risk given that both Finland and Sweden are not members of Nato. It could take 12 months to ratify their membership. That said, Russia’s invasion of Ukraine is hardly going to plan. According to US intelligence, Russian army casualties have rocketed to more than 75,000 – a loss equivalent to almost the entire British Army – reports The Telegraph. Given the scale of these losses, an invasion of Nordic countries is hardly likely. The far greater risk for SigmaRoc is a protracted downturn in the European economy. It’s clearly a possibility, but with the shares trading on a modest 2022 price/earnings (PE) ratio of 9, it’s more than priced in.
SigmaRoc’s shares have lost 16 per cent of their value since the annual results (‘Priced for a profitable recovery, 28 March 2022), albeit the price is still 33 per cent ahead of my 46p entry point (Alpha Research: ‘A general election winner’, 12 December 2019), and have recovery potential ahead of interim results on 12 September 2022. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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