Breedon moves into the US market with $300mn acquisition

Given the state of its end markets, the performance of aggregates group Breedon (BREE) was solid enough in 2023, with the 7 per cent increase in its top line due entirely to price increases of 9 per cent, while volumes declined by 2 per cent. This led to a squeeze on its operating margin, which fell from 10.6 per cent to 9.8 per cent.

The big news, however, was that Breedon’s search for a suitable entry point into the US market has concluded through the $300mn (£238mn) acquisition of BMC Enterprises.

Breedon chief executive Rob Wood said the company had been looking for a “beachhead transaction” that it could fund through its own balance sheet for a business with an experienced management team that also offered appropriate returns. “We believe we have found that transaction,” he said.

BMC has grown sales at a compound annual rate of 12 per cent and adjusted cash profit at 22 per cent over the past decade, to $178.9mn and $35.5mn, respectively. 

Breedon expects the deal to be earnings-enhancing in the first full year of ownership and is bullish on the US market, where growth of 6.5 per cent is expected over the next three years as both federal and state infrastructure spending programmes ramp up. It also sees opportunities for consolidation in what is a “highly fragmented” market. 

So although the deal will increase net debt (excluding leases) from 0.5 times underlying cash profit currently to 1.4 times, this looks like a risk worth taking. And with Breedon's shares trading below their five-year average at 12 times FactSet consensus earnings, we concur with RBC Capital Markets analyst Anthony Codling's view that a re-rating is likely. Buy.

Last IC view: Buy, 356p, 26 Jul 2023