- Pro-forma cash profit up 6 per cent to £47.6mn on 17 per cent higher pro-forma revenue of £247mn
- Underlying EPS up a third to 3.61p
- Second-half trading started well
SigmaRoc (SRC:50p), a group that is pursuing a buy-and-build strategy in the heavy building materials sector, previewed its first-half results in last month's robust pre-close first-half trading update (‘On solid foundations’, IC, 1 August 2022).
Reported revenue and cash profit both trebled in the six-month period, 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. On a pro-forma basis, growth rates were still highly respectable (17 per cent rise in revenue and 6 per cent for cash profit, respectively), the lag in profit reflecting the impact of inflationary cost pressures. Cash profit margin of 19 per cent of revenue is solid and joint house broker Peel Hunt is maintaining full-year cash profit estimates of £97mn on annual revenue of £508mn, implying the group is being valued on a multiple of five times forecast annual cash profit to enterprise valuation.
The miserly rating reflects the risk of a macroeconomic downturn dampening demand even though the group confirmed that trading remains good across the majority of its end markets (housing, infrastructure and industrial). Also, the potential for further sharp increases in electricity prices has been undermining investor confidence, so much so that the share price has declined 20 per cent since last month’s pre-close trading update.
Debt should not be an issue as cash generation and ongoing operational improvements mean that balance sheet leverage (net debt to underlying cash profit) of 2.2 times is well within the group’s 3.5 times limit. Analysts at Peel Hunt forecast current-year free cash flow of £26mn, rising to £36mn in 2023, a hefty sum for a £316mn market capitalisation company. This implies a thumping free cash flow yield of 11.4 per cent for 2023. It’s certainly not holding back the group. Alongside the results, the board announced a £20m investment in a new joint venture with ArcelorMittal to produce 900,000 tonness a year of lime (a key ingredient in steel production) from a facility in Dunkirk close to the steelmaker’s plant.
SigmaRoc’s share price is modestly above my 46p entry point (Alpha Research: ‘A general election winner’, 12 December 2019), and I strongly feel that the risk of a deterioration in trading is more than priced into the low-ball valuation. Recovery buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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