- First-half adjusted pre-tax profit rises 13 per cent to £33mn
- 17 per cent higher revenue of £290mn
- EPS up 11 per cent to 4p
- Net debt cut 15 per cent to £183mn
- Leverage ratio reduced 25 per cent to 1.69 times
- Forecast free cash flow yields of 13 per cent (2023) and 17 per cent (2024)
SigmaRoc (SRC:54p), a group pursuing a buy-and-build strategy in the heavy building materials sector, previewed its robust interim results at the pre-close trading update in late July (‘A building company worth backing’, 24 July 2023).
Earnings and cash flow guidance remain unchanged, implying the shares are rated on a modest price/earnings (PE) ratio of 7.2 and offer a thumping 13 per cent free cash flow yield (FCF) for the current year based on forecasts from brokerage Peel Hunt. The solid cash flow is paying down borrowings, which could be slashed by 12 per cent in the second half to close this year at £161mn. This implies a leverage ratio of below 1.5 times cash profit estimates. Moreover, Peel Hunt predicts SigmaRoc could generate FCF of £63mn in 2024, or 17 per cent of its current market capitalisation, thus offering scope to further deleverage the balance sheet as well as funding further bolt-on earnings-accretive acquisitions.
One reason for the low rating is that investors have become cautious in a more challenging macroeconomic environment. However, the group continues to perform well, a reflection of its diversified revenue stream across multiple market segments and exposure to end markets offering structural growth.
For instance, 43 per cent of revenue is derived from industrial mineral markets. The transition away from plastic packaging is supporting robust demand for board and pulp, and SigmaRoc is enjoying strong demand from the metals segment, too. In infrastructure markets, the energy transition sector is driving sustained demand for aggregates, dimension stone and downstream products with several major projects underpinning sales visibility into the second half.
Strength from these sectors has helped to mitigate weaker demand from residential construction markets which account for 20 per cent of revenue. The group has a degree of pricing power, too, so has been able to pass through inflationary cost pressures, as highlighted by small increases in both gross margin and cash profit margin.
Furthermore, SigmaRoc is set to benefit from six acquisitions that are being funded by the £30mn proceeds from February’s placing. They will contribute an annualised cash profit of £8mn, a healthy return on the investment. Profits are also being supported by organic growth initiatives with £6.6mn of investment in these areas forecast to deliver £2mn of annual cash profit.
The bottom line is that SigmaRoc’s solid operational performance is not aligned with its low-ball rating. In fact, both its PE ratio and enterprise valuation to cash profit multiple are more than 40 per cent below the building materials average – anomalous ratings given that Peel Hunt believes forecast risk is to the upside given the robust start to the second half. 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 at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
