- First half revenue up 17 per cent to £290mn
- Cash profit rises 15 per cent to £55mn
- Interim EPS increases 11 per cent to 4p
- Acquisition programme completes
SigmaRoc (SRC:62.6p), a group pursuing a buy-and-build strategy in the heavy building materials sector, has delivered an eye-catching first half trading performance that more than justifies the 16 per cent share price rally since the first half results (‘Lock in this 15 per cent free cash flow yield’, 27 March 2023).
The group’s strategy is to buy, improve and integrate platforms of companies in the heavy building materials sector, focusing on cash-generative assets in niche markets that produce aggregates, concrete, and other related assets. Acquisition targets are asset-backed and have strong market positions in mainly regional markets, so are protected by strong customer relationships as well as providing scope to add value through operational efficiencies.
SigmaRoc’s diversified end market exposure, geographic spread of activities and a decentralised operating model explains the resilience of the first half performance despite challenging market conditions. Even though underlying volumes declined three per cent, like-for-like revenue and cash profit both increased 12 per cent in the six-month trading period as dynamic pricing enabled management to protect margin.
Structural growth drivers
A focus on end markets underpinned by structural growth drivers has been key, too. For instance, 37 per cent of group revenue is derived from infrastructure markets in the construction sector which are supported by ongoing strong demand from energy transition projects. This is mitigating softness elsewhere in new build residential construction.
In industrial minerals, SigmaRoc is enjoying strength in the environmental, agriculture and chemical segments (19 per cent of revenue) as well as robust demand in metals (11 per cent). The transition away from plastic packaging is another structural growth driver, pumping up demand for pulp and board (13 per cent of revenue).
A smart acquisition strategy
The benefit of adopting this approach is that SigmaRoc can exploit acquisition opportunities at modest earnings multiples as multi-nationals scale back operations to de-gear balance sheets and smaller privately-owned players cash in the value of assets due to succession issues. Value can be added to smaller acquisitions by strengthening sales teams and improving finance and administration activities. There is also potential to revitalise sales that may have flagged under previous management who lacked focus.
SigmaRoc’s well regarded management team has proved adept at deal-making since the IPO in 2017. By the start of this year, they had acquired 12 businesses on an average seven times cash profit multiple to enterprise valuation and are investing £31mn making a further 11 acquisitions to add £8mn to cash profit, a multiple of 3.9 times. The latest complementary acquisitions include a UK manufacturer of speciality retaining wall systems that sits well alongside the expansion of SigmaRoc’s PPG precast platform into wall solutions.
As part of the development pipeline, SigmaRoc has realised £11m on a multiple of 12.9 times cash profit offloading non-core assets (six hectares of industrial land in Belgium, a grinding plant in Poland and a road maintenance business in Belgium). Some of the cash is being recycled into organic growth investment projects including a new asphalt plant in the UK, and the conversion of kilns to biofuels in its overseas plants. It’s smart business which will add £2mn to annual cash profit at a cost of only £6.6mn.
Importantly, balance sheet gearing is sensible. The ratio of total net debt, including further borrowings such as deferred consideration, to cash profit was 1.7 times on 30 June 2023 and falling. Analysts at Liberum Capital predict year-end net debt of £161mn will equate to 1.45 times their full-year cash profit estimate of £111mn, up from £101mn in 2022.
Solid earnings expectations
True, adjusted pre-tax profit of £65mn is likely to only rise four per cent on 9.8 per cent higher forecast revenue of £590mn due to rising interest costs, but it is still a resilient result. Furthermore, with the benefit of a full 12-month contribution from the acquisitions and organic growth projects to come in the 2024 financial year, Liberum is on firm foundations predicting that both cash profit and pre-tax profit can kick on to £119.7mn and £72.7mn, respectively, on revenue of £627mn next year.
On this basis, expect earnings per share (EPS) of 8p (2022) to dip slightly to 7.4p (2023) due to the increased share count following the February 2023 placing to fund the acquisitions, before bouncing back to 8.2p (2024). This implies the shares are rated on a 2024 price/earnings (PE) ratio of 7.6 and on 4.8 times 2024 cash profit to enterprise valuation, discounts of 45 per cent and 40 per cent, respectively, to the building materials average rating. Buy.
