Shares in Breedon Group (LON:BREE) rose today as Numis reiterated an ‘add’ rating and target price of 82p after the construction materials group reported a 50% surge in full year profits.
The group's profit before tax jumped to £46.8mln in 2016 from £31.3mln in 2015, while underlying earnings before interest and tax (EBIT) soared 58% to £59.6mln from £37.8mln.
The company’s 2016 profits were driven by the integration of recently acquired Hope Construction Materials. The acquisition, approved by the Competition and Markets Authority last July, has turned Breedon into the UK’s largest construction materials group.
A five-month contribution from Hope helped full year revenue rise 43% to £454.7mln from £318.5mln.
Net debt at the end of the year stood at £159.3mln, compared to a positive net cash position at the end of 2015 £10.3mln.
The change in the debt position reflected the acquisition of Hope and also the purchase of Sherburn Materials towards the end of the year.
Numis said the pre-tax profits were 2% ahead of its estimates.
"Good figures and the confident statement from Breedon both about the wider market and group prospects are welcome, and we believe the scope for upside in estimates remains on both an organic and acquisitive basis," Numis said.
"The shares stand at a premium rating to our materials and merchants sector but based on target margins and ongoing scope for operational outperformance we expect sustained organic double digit growth in earnings which will enable the group to continue to outperform."
Numis maintained its guidance for pre-tax profit in fiscal year 2017 and reduced its net debt forecast to £120mln from £142mln.
The broker expects 2018 to see “double digit” organic growth and a further reduction in net debt in the absence of acquisitions.
The UK government's pledge to support infrastructure and housing projects should also help the construction market, Numis said.
“Breedon growth this year and beyond will reflect strong underpinning of work relating to existing pipelines and contracts in key markets plus the scope to move underlying margins from 13.1% in 2016 to 15% by 2020 (excluding Hope, where the margin is lower) through management operational actions coupled with capex programmes across all areas.
“Given the backdrop of a stronger balance sheet, we continue to believe that Hope provides a greater platform for bolt-ons and potentially larger acquisitions.”
Shares rose 2.75% to 79.63p in early trading.