The International Energy Agency (IEA) estimates that the buildings and construction sectors account for more than a third of global energy consumption and almost two-fifths of carbon emissions. That places improving the energy efficiency of buildings high on the climate change agenda – good news for Dublin-listed Kingspan (KGP), a specialist in high-performance insulation and ‘building envelope’ solutions. Enjoying market-leading positions around the world, its products reduce energy usage by managing moisture, temperature, light and air quality.
Structural growth drivers
More resilient than during last recession
These green credentials have proved a hit with funds focused on environmental, social and governance (ESG) criteria. Kingspan is the second-largest holding of the top performing Liontrust Sustainable Future UK Growth Fund (GB0030028764) for which energy efficiency is a key investment theme. And manager Peter Michaelis says the group should be capable of “posting ongoing growth despite concerns around global demand”. Meanwhile, Pictet Asset Management holds shares across a number of its funds. Steve Freedman, senior product specialist in the thematic equities team, recently told Investors Chronicle he likes the “powerful” structural demand drivers: “rapid urbanisation, which could lead building floor area to almost double by 2050, and tightening regulations”.
Favourable regulations include the European Union’s ‘energy performance of buildings directive’ (EPBD), which mandates member states establish strategies to decarbonise existing buildings by 2050 and make new buildings “nearly zero-energy” from 2021. With the European ‘Green Deal’ targeting a “renovation wave”, potential subsidies could boost the appetite for energy-saving buildings solutions. This could favour Kingspan’s slimmer insulation designs given space constraints in older buildings.
Indeed, research and development provide a competitive edge that underpin a mid-teen return on capital employed (ROCE) and a trading profit margin of 10.7 per cent last year. According to broker Jefferies, around 30 per cent of sales come from proprietary or patented products. This includes the ‘QuadCore’ insulated panel system, which is lighter, more cost-effective and more thermally efficient than traditional mineral fibre insulation. Almost two-thirds of total revenue came from modular insulated panels in 2019, underlying sales of which were flat as price decreases from raw material deflation offset volume growth. But sales of QuadCore surged 36 per cent, driving a 0.4 percentage point expansion in the segment’s adjusted operating profit margin to 10.4 per cent.
With the Covid-19 pandemic shuttering construction sites, group revenue dropped 35 per cent year on year in April. Expecting to break even for the month, this run rate is guided to persist for at least a few weeks. As we head into an economic downturn, investors may be deterred by the cyclical exposure – between 2008 and 2009, adjusted operating profit plunged 60 per cent. But Kingspan is arguably more resilient now than during the last recession. An expanded global footprint means the UK and Ireland account for just under a quarter of total sales versus more than 50 per cent a little over a decade ago. Competitor weakness could facilitate greater penetration in the US and emerging markets, complementing plans to open new production facilities.
With non-residential construction responsible for more than 80 per cent of revenue, broker Berenberg notes this activity held up better in the last crisis as projects that had commenced were finished. The broker also estimates 35 per cent of turnover comes from warehousing and data centres where investment could be sustained – Covid-19 has accelerated the shift to e-commerce while more remote working necessitates cloud computing capacity.
Excluding lease liabilities, Kingspan finished 2019 with €633m (£567m) of net debt, down 13 per cent from a year earlier and equivalent to 1.1 times cash profits (Ebitda). Spending on acquisitions dropped from €469m in 2018 to €142m and free cash flow jumped 9 per cent to €337m. With the final 33.5¢ dividend withdrawn, over €1bn of cash and undrawn committed facilities at the end of April leaves headroom to pursue acquisitions opportunities. The group expects net debt to reduce to €580m at the half-year stage, with Jefferies projecting leverage falls to 0.8 times by the year-end.
|ORD PRICE:||5,035ȼ||MARKET VALUE:||€9.1bn|
|FORWARD DIVIDEND YIELD:||0.8%||FORWARD PE RATIO:||27|
|NET ASSET VALUE:||1,145ȼ*||NET DEBT:||37%**|
|Year to 31 Dec||Turnover (€bn)||Pre-tax profit (€m)***||Earnings per share (ȼ)***||Dividend per share (ȼ)|
|Normal market size:||500|
|*Includes intangible assets of €1.6bn, or 885ȼ a share|
|**Includes lease liabilities of €125m|
|***Jefferies forecasts, adjusted PTP and EPS figures|