- Rising average cost of materials as a proportion of a total build
- About 10 per cent of all building materials are sold online by retailers
It’s no secret that building materials prices have been on a tear over the past few months. Construction output growth recently hit a seven-year high during May and the Construction Leadership Council has warned that there has been no improvement in the availability of key building materials.
The extent of the overall rise in materials prices was laid bare in the latest statistics compiled by the Department of Business. The price index for all construction and renovation materials currently stands at 123, compared with 113 this time last year, and just 98 in 2016. The average cost of materials as a proportion of a total build has effectively doubled to 25 per cent since the start of the year.
Online versus bricks 'n' mortar
Trying to list against such a background would seem ambitious but is there is a place for an online niche retailer specialising in building materials, in what is a relatively traditional bricks 'n' mortar (that is if you can find any) retail business. Based out of Plymouth, CMO (formerly ‘Construction Materials Online’) has been built up over the past decade by buying up suppliers of key products – it acquired Total Tiles in late 2020 for £14.7m – and acting as a third-party agent between suppliers and consumers for others. Builders’ merchants have made progress with online sales, but CMO claims that it has the largest product range available online and that the market, overall, is about 10 years behind the rest of retail when it comes to online ordering.
On a pro forma basis, the company says it generated sales of £67m last year, with cash profits of £4.4m on an underlying basis – implying a basic operating margin of 6.5 per cent, perhaps a percentage point better than the likes of traditional merchants like Travis Perkins. It has about a 1 per cent share of the total materials market. For comparison, the last set of reported accounts, available at Companies’ House, showed revenue in 2019 of £47m, which generated a pre-tax loss of £91,330, mainly down to capital charge payable to its private equity owners. At that point the company had available cash resources of £2.44m at hand.
Overall, about 10 per cent of all building materials are sold online by all retailers, out of total sales of £27bn at 2019 prices – and management argues that this gives CMO huge potential for sales growth. CMO isn’t the only company to supply building materials on an online-only basis, but the defining feature of most of its online competition is a lack of scale and vertical integration.
Why list now?
The company plans to use the proceeds from the listing to pay down debt and restructure its balance sheet, as well as allowing an exit for Key Capital Partners, which initially invested £8.65m in 2017, though it will maintain a stake of 26.8 per cent after the fund-raising is completed. It also follows on from a spate of specialist listings of buildings goods companies. For example, earlier this Spring saw the listing of Victorian Plumbing (VIC) on Aim which has a similar platform-style business, but one which sells fancy bathrooms to the aspirational middle class. In keeping with the tradition established by certain IPOs this year, the shares are down over ten per cent since listing.
Just about every technology-based IPO claims to be “disruptive” within a given industry, often with the most tenuous of justification. Part of the reason for the sudden spate of IPOs is that listing is simply easier, with large amounts of shareholder liquidity actively looking for something to do, so companies have a strong incentive to seize the opportunity while it lasts. CMO’s IPO should ensure a reasonable amount of share liquidity with a free float of 46 per cent, out of a total base of 71.9m shares.
The problem one can see with CMO is that while not having the warehouses and floor space that traditional builders’ merchants must pay for ensures a higher return on capital employed, it still operates in an environment where margins are comparatively thin – only taking a sliver of profit between the supplier and the customer; CMO is essentially a sales agent with a front-end retail platform and a back office that organises the logistics. Encouragingly, it addresses these issues with its push into acquiring vertically integrated supply businesses, as this allows it to capture more of the value in the supply chain. Arguably, until it has achieved some sort of greater scale, which a listing will make easier with better access to capital, it probably makes more sense to use CMO’s service rather than participate directly in an IPO – at least until the price starts to settle down. Await developments.
