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Breedon Aggregates Ltd set to build on successful 2015

Construction material company says outlook is encouraging despite global economic turbulence
Breedon Aggregates Ltd set to build on successful 2015
Breedon is investing in acquisitions and new equipment

Breedon Aggregates Ltd (LON:BREE) reported record results and an encouraging outlook, despite economic and political headwinds.

Breedon, which produces aggregates, asphalt and ready-mixed concrete for builders, said in March that pre-tax profits in the year to December 31 rose 46.4% to £31.3mln on an 18.1% revenue increase to £318.5mln.

During the year, the group finalised its biggest contract, a £55mln Scottish roadbuilding joint venture, and agreed to buy Hope Construction Materials in Derbyshire for £336mln.

Earlier this year, new chief executive Pat Ward replaced Simon Vivian, who will stay on the board as a non-executive director.

Breedon said prospects were encouraging, with modest but sustained growth in UK construction output predicted in the next few years.

It said the outlook for the housing and infrastructure markets in the next few years was positive despite various different uncertainties.

Ward said the company was still supplying a lot of wind farms, but he suspected that may fade away, although upkeep of existing structures would continue.

Wind farms and the wider renewable industry have taken a hit from cuts in government subsidies.

Ward said: “There is an underlying subdued situation, but I think there’s still a lot of opportunity for us.”

Breedon plans to focus in the short term on absorbing Hope into the business, but said it was still reviewing a number of business development opportunities.

When the results were released in March, Cantor Fitzgerald noted that Breedon managed to hold on to a meaningful amount of the lower fuel price with adjusted operating margins climbing 2.9 percentage points to 11.9%, well on the way to the medium-term target of 15%.

The broker said it expected management to encourage investors to be cautious on the pace of margin growth, but believed low oil prices would allow further gains.

"Overall we see these results as solid, justifying our positive stance and indicating management’s strategy remains on track. We reiterate our 'buy' recommendation and 75p target price," Cantor said at the time.

Approaching the second half, the broker piped up again this time warning of a potential slow-down in H1.

"Comments from peers suggest underlying aggregates volumes be down in H1 2016 compared with a year ago with delays to infrastructure projects, the switch to Highways England and the Brexit distraction," wrote Cantor's analysts.

But the broker sees further "sizeable acquisitions and synergies" from Hope as key to continued share price performance. 

The broker reiterated its Buy recommendation and increased its target price from 75p to 80p, with a further significant upside predicated on further acquisitions.


On the outlook...

"The outlook for our business continues to be encouraging.  The Government remains committed to infrastructure investment and all the relevant forecasting bodies predict modest but sustained growth in construction output over the next few years.

"This means a steady growth in demand for our products.  Against this background, volumes are expected to recover gradually to pre-recession levels by 2020."

On past and future acquisitions...

"Hope Construction Materials itself will significantly increase our geographic coverage and bring us a number of investment prospects, but we also see many other potential opportunities to further expand."

On the UK's EU referendum...

"Domestically, the EU referendum could also have an adverse effect on growth. There's lots of wild speculation about what it means. We’re certainly not taking a side one way or the other, but it would be nice to get the uncertainty out of the way by June."

"Notwithstanding this, Breedon Aggregates begins an exciting new era in 2016 with the planned acquisition of Hope and we look forward to the future with confidence."


Breedon Aggregates Ltd, based at Breedon-on-the-Hill near East Midlands airport, is the largest independent aggregates business in the UK after the global majors.

It runs 53 quarries, 26 asphalt plants, 61 ready-mixed concrete & mortar plants and three concrete block plants in England, Wales and Scotland, employing more than 1,200 people.

The group, which has English and Scottish divisions, has strong asset backing, with more than 500 million tonnes of mineral reserves and resources in the UK.

It has been pursuing a policy of expansion both through the core business and via acquisitions, having announced the planned £336mln acquisition of Hope Construction Materials in November.

Hope was formed in 2013 out of the merger of rivals Tarmac and Lafarge and its acquisition, which remains subject to regulatory approval, almost doubles the size of the business.

The former Barr business received significant additional investment following its acquisition in 2014 and this has already started to pay dividends in improved efficiency and cost reduction.

Other significant investments during the year included a new crushing train and block production plant at Naunton and upgrades of its vehicle fleet with the purchase of a number of new mixers and tippers.

It believes industry prospects are encouraging, saying the UK government remains committed to infrastructure investment.

The company also points to the fact that all the relevant forecasting bodies predict modest but sustained growth in construction output over the next few years.

It acknowledges capital spending has affected the balance sheet, but says it has £10mln of cash versus £66.3mln of debt a year ago.


Breedon's share price has steadily risen from about 18p in March 2011 to about 76.25 now.


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Breedon Group Timeline

January 05 2017
August 01 2016

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