Breedon pays out maiden dividend

Aggregates supplier Breedon’s (BREE) results reflect the old proverb about rolling stones and moss.

Momentum in the first half of last year carried through into the second and a 21 per cent like-for-like increase in revenue was accompanied by improved margins. Pre-tax profit more than doubled when compared with a Covid-disrupted 2020 and was a fifth higher than 2019.

Free cash flow generation of £127mn meant that even after cutting net debt by a third to £212.5mn, the company had enough left over to recommend payment of a maiden dividend of 1.6p per share.

Borrowing had increased in 2020 to allow the company to buy cement giant Cemex’s UK assets for £178mn, but with debt now substantially pulled back and the outlook for its end markets in infrastructure and construction looking bright, chief financial officer James Brotherton said Breedon plans to return more cash to shareholders. A payout ratio of 26 per cent this year is targeted to increase to a longer term target of 40 per cent.

The one cloud on the horizon is input cost inflation, given its heavy use of energy to produce bricks, cement and concrete products, as well as bitumen for surfacing.  Even though it “substantially” hedges energy requirements and carbon credits a year in advance, it expects costs to rise by about 10 per cent, or £100mn this year. It is adopting a “dynamic” approach to pricing to recover overheads as quickly as possible, though, and remains confident of delivering “profitable and cash generative” growth.

We moved Breedon’s shares from a buy to hold six months ago when their valuation topped 26-times earnings. A subsequent sell-off and upgrades to the consensus earnings forecast for this year to 6.4p for this year means they now trade at half this level, well below its five-year average. We think this represents a buying opportunity.

Last IC View: Buy, 109p, 22 Jul 2021