SigmaRoc has further to run as profits could double

SigmaRoc (SRC:66p), a group pursuing a buy-and-build strategy in the heavy building materials sector, pulled off its largest deal to date with last autumn’s transformational €1bn acquisition of the European lime businesses of larger rival CRH (CRH).

The €745mn (£645mn) first part of the transaction completed early this year and was funded by the proceeds from a £200mn equity raise at 47.5p a share, and a drawdown from a new €875mn debt facility priced at a margin of 2.75 per cent above Euribor. The fact that SigmaRoc’s share price has rallied hard since the acquisition was announced is no coincidence (‘SigmaRoc enters the big time with €1bn acquisition’, 30 November 2023).

Transformational deal

That’s because several large institutional investors had been waiting in the wings for management to pull off a deal that gave the group a dominant position across multiple markets and meant that it was no longer sub-scale. The acquisition has done just that, doubling the group’s size and making it Europe’s second-largest producer by volume of a critical industrial and construction material. SigmaRoc now operates across 14 countries and has mineral reserves of 2.7bn tonnes.

Brokerage Peel Hunt estimates that current-year revenue and cash profit will almost double to £1.1bn and £222mn, respectively, to deliver 60 per cent higher underlying pre-tax profit of £114mn. Analysts at the firm also expect another step change in profitability in 2025 as revenue growth opportunities (expansion into new geographic regions) and cost synergies (operational and site network improvements, and procurement savings) deliver additional cash profit.

Assuming SigmaRoc hits Peel Hunt’s 2025 cash profit estimate of £259mn, which is based on revenue of £1.2bn, the group could be making pre-tax profit of £146mn next year, or double the 2023 result. SigmaRoc’s management is also targeting a 95 per cent cash conversion rate, and the plan is to cut the leverage ratio (net debt to cash profit) from 2.4 times analyst forecasts at the end of this year to below one times within four years.

Strategic benefits

The increased scale of the operation aside, chief executive Max Vermorken highlights both the defensive and growth characteristics of the lime and limestone businesses acquired. They have high barriers to entry, strong pricing power, diversified end markets (steel, chemical, agriculture, environmental industries) and are a critical material in the shift away from fossil fuels and decarbonisation of construction. Key applications include the production of lithium batteries for electric vehicles and as a substitute for 'cementitious' material in the construction industry.

Of course, there is execution risk, but that has always been the case since I first suggested buying the shares, at 46p (Alpha Research: ‘A General Election winner’, 12 Dec 2019). Management’s track record has been impressive to date, having successfully bedded down past acquisitions, delivered the synergies promised and quadrupled earnings per share (EPS) to 8p in the past six financial years.

Rated on cash profit multiples of 6 (2024) and 4.8 (2025) to enterprise valuation and underpinned by free cash flow yields of 9 per cent (2024) and 16 per cent (2025), expect SigmaRoc’s increased scale, low rating and exposure to decarbonisation trends to attract further investor interest. Buy.

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