Breedon upbeat on short-term prospects

Breedon (BREE) posted a strong set of results for the first half, with operating profits growing by 20 per cent on the back of a double-digit sales increase and a slight widening of its margin. 

Its management also said full-year underlying earnings will be at the top end of consensus estimates, which currently range from between £140mn and £149mn, or 6.1p-6.8p per share.

Such forecasts usually spark enthusiasm from investors, but in this case the share price stayed stubbornly flat – remaining about 25 per cent lower than where it started the year. This is in line with a 24 per cent fall in its benchmark index, with investors turning increasingly negative on the ability of anything construction-related to generate earnings growth. 

Breedon argued that it is better positioned than most. It owns the quarries, cement and asphalt plants that provide construction materials so is able to pass through costs. Order books remain healthy and enquiries are increasing, the company said. 

It also argued that its long-term prospects are underpinned by the fact that about half of its revenue comes from infrastructure, where “fundamental underinvestment is being addressed by long-term, central government commitments”.

There is a danger, though, that these commitments may not be as solid as they once seemed. Although Conservative party leadership contender Rishi Sunak himself made the pledge to invest more than £600bn in infrastructure during the current parliament’s lifespan, that was then and this is now. Spiralling inflation and a higher interest burden might encourage any incoming chancellor to cut, or at least delay, capital spending commitments.

Indeed, Breedon acknowledged that although it expects market conditions in Britain, where it makes most of its money, to remain supportive, “the wider backdrop has become increasingly uncertain”.

Breedon’s shares trade at about 10 times earnings, well below their five-year average but ahead of peers. Given the shakier long-term outlook, we move to hold.

Last IC View: Buy, 82p, 10 Mar 2022