Construction materials group Breedon Group plc (LON:BREE) is already beginning to realise the benefits of its decision to buy Hope Construction Materials.
The company’s 2016 profit before tax shot up 50% to £46.8mln from £31.3mln in 2015, while underlying earnings before interest and tax (EBIT) soared 58% to £59.6mln from £37.8mln.
Hope contributed to five months of 2016, burnishing an already good performance from the former Breedon Aggregates business.
Breedon changed its name to Breedon Group from Breedon Aggregates following the acquisition of Hope to reflect that its business has moved beyond just aggregates. The Competition and Markets Authority cleared the purchase last July.
The group said the integration of Hope is well advanced and synergies have accelerated.
Revenue rose 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, reflecting the acquisition of Hope and the purchase of Sherburn Materials towards the end of the year.
Guidance for fiscal year 2017...
Group finance director Rob Wood said the company is comfortable with the market consensus for underlying EBIT of £76mln to £77mln in fiscal year 2017.
The group expects net debt to fall to between £120mln to130mln at the end of 2017, less than consensus forecasts of £140mln to £150mln.
Capital expenditure is expected to reach £45mln, compared to anlaysts' estimates of £43mln, as the group continues to invest in its future.
What the broker said
Numis reiterated an ‘add’ rating and target price of 82p, saying its 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 has maintained its estimates 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.”
Hope acquisition broadens opportunities
With Hope now in the fold, Breedon is the UK's largest independent construction materials group, though chief executive Pat Ward said aggregates will always be a fundamental part of the business.
The change of its name represents the company “growing up a bit”, in Ward’s view, and acknowledges “just how broad and significant our business has become”.
Breedon agreed to buy Hope, formed in 2013 out of the merger of rivals Tarmac and Lafarge, last year for £336mln on a cash-free and debt-free basis. It almost doubled the size of the business.
At the time the acquisition was announced, Hope had more than 160 operational sites, including the Hope cement works in Derbyshire, five quarries and 152 concrete plants. Breedon has agreed to sell 14 of its ready-mixed concrete plants.
The acquisition broadened the geographical footprint of the business and that should make some bolt-on acquisitions feasible from a logistics point of view that previously the company would have rejected.
The group is well-placed for both organic growth and growth by acquisition, and Ward sees aggregates as continuing to be the main driver of that growth.
Peter Tom, executive chairman, said: "As we look ahead, the government appears to have finally committed to substantial investment in the UK's infrastructure and this, coupled with anticipated growth in the private housing market, is expected to bring significant medium- and long-term benefits to our business."
Tom conceded there would likely be a period of uncertainty until the UK's exit terms from the European Union have been determined, but said Breedon had demonstrated its ability to thrive in adversity.
“Uncertain conditions always create opportunities,” Tom said.
Largest independent aggregates business
The firm, 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 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.