- Cash profit doubles to £101.7mn, above consensus (£97mn)
- Pre-tax profit up 132 per cent to £62.7mn on revenue up 98 per cent to £538mn
- Full-year adjusted EPS increases 49 per cent to 8p
- Free cash flow surges 83 per cent to £54.7mn
- Analysts upgrade 2023 and 2024 estimates
SigmaRoc (SRC:54p), a buy-and-build specialist, not only outperformed analysts’ earnings expectations for last year, but prompted a round of upgrades, too.
It was an eye-catching performance given that the group had to contend with a £5mn profit headwind in the first quarter of 2022 due to industrial action and other customer disruption, volatile energy prices, uncertain supply dynamics, and the impact of the Russian invasion of Ukraine. Admittedly, the annual results benefited from a full 12-month contribution from SigmaRoc’s largest acquisition to date, the €470mn (£414mn) purchase of limestone and lime products company Nordkalk. The group also made three other small acquisitions which brought annualised revenue of £24.5mn and cash profit of £7.3mn. However, on a like-for-like basis, 2022 revenue and adjusted cash profit increased by 19 per cent and 9 per cent, respectively, highlighting the underlying strength of the business.
Resilient and diversified revenue stream
The resilience of end-market demand for SigmaRoc’s products, and management’s ability to manage costs – the cash profit margin increased from 18.1 to 18.9 per cent – is being supported by structural growth drivers that underpin 44 per cent of annual revenue, robust demand from infrastructure markets (32 per cent of revenue) and healthy order books in residential markets (25 per cent).
For instance, the transition in packaging materials away from plastic is benefiting pulp, paper and board order books (14 per cent of group revenue), and substitution by customers of materials previously sourced from Russia has created an additional tailwind for strong ongoing demand seen across agriculture, chemical and environmental markets.
The group’s well-regarded management team has also played a smart hand by focusing on cash-generative assets in niche markets that produce aggregates, concrete and other related assets. Acquisition targets are asset-backed and control strong market shares in mainly regional markets, thus providing scope to add value by improving operational efficiencies as well as benefiting from strong customer relationships.
SigmaRoc makes acquisitions on modest earnings multiples of around six times cash profit, either buying businesses from privately owned players looking to crystalise the value of their assets due to succession issues or from multinationals scaling back to pay down borrowings. Some of the businesses bought may have flagged under previous management due to a lack of focus, so are ripe to be revitalised, while value can be added to smaller acquisitions by strengthening sales teams and improving the cost-effectiveness of finance and administration activities.
The strategy has certainly paid off, as highlighted by the improving financial returns being generated: return on invested capital increased by more than three percentage points to 10.7 per cent; and annual free cash flow of £54.3mn (7.9p a share) equates to 14.5 per cent of SigmaRoc’s market capitalisation. Importantly, the balance sheet is not overstretched (leverage ratio of 1.8 times cash profit) and bumper free cash flow generation is expected to slash net debt by more than a fifth to £150mn this year.
On the upgrade
Post results, analysts at Peel Hunt upgraded their 2023 pre-tax profit estimate by 10 per cent to £65mn based on revenue of £599mn and lifted their 2024 pre-tax profit estimate by 14 per cent to £71.5mn on revenue of £623mn. On this basis, the shares are rated on modest price/earnings (PE) ratios of 7.3 (2023) and 6.6 (2024). The cash profit to enterprise valuation multiples are 4.9 and 4.3, respectively, hardly exacting for such a highly cash-generative group.
The shares rallied 23 per cent after my last buy call (‘A building material recovery buy’, 12 September 2022), albeit the price has succumbed to profit-taking since early February. This looks like a repeat buying opportunity to me. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.95 [UK].
Promotion: Subject to availability, the books can be purchased for the promotional price of £25 plus £5.75 postage and packaging.
