Breedon Aggregates' growth to continue, says Cantor Fitzgerald

Deals such as the Holcim /Lafarge merger should throw up more acquisition opportunities for quarry owner Breedon Aggregates (LON:BREE), argues Cantor Fitzgerald. The broker says international majors are now focused on size, which means they are now more likely sellers than buyers of small assets in the UK, an area where Breedon specialises. It has made eight acquisitions in the past four years and Cantor, which has just started coverage, reckons its track record with these deals “sets the bar for value creation from asset purchases”. Facilities are in already in place for up to £50mln in acquisitions without needing to raise new equity. Helping here will be the fragmented nature of the UK aggregates business. Small independents are in charge of 400 quarries that produce 35% of the UK’s annual material consumption, a structure that gives Breedon plenty of room to grow. Cantor believes Breedon will be near its long-term 15% underlying profit [EBITDA] margin target this year, compared to 11.6% in 2012. Acquisitions have chipped in £12.5mln to that growth and if Breedon can repeat this over the next three years through more deals, Cantor believes it would add a minimum 7p to the share price. In addition, the UK construction market is expected to grow by 3%-4% with the roads budget, of particular interest to Breedon, to grow by 11% this year and 1%-7% thereafter. Cantor concedes Breedon shares are highly rated already, but a superior growth profile and the fact it has grown from “almost nothing” in 2008 to the fifth largest aggregates producer in the UK today warrants the premium. "To invest at this valuation one must believe that Breedon will close further acquisitions, increase growth capex as planned and realise strong returns from this capex. "We think it can, aided by a strong underlying market. The group is uniquely placed to close on targets in our view and has a track record of creating value by doing so." 'Buy' with a target price 55p, it says. Shares today were up slightly to 46.8p.