Berenberg has upgraded its numbers and upped its price target for Breedon Group PLC (LON:BREE) following the increase in guidance given by the aggregates company.
The new price target is 85p, up from 80p. Breedon’s shares currently trade at 71.5p.
The German bank notes the company delivered impressive growth in 2016, despite tricky conditions in its end markets.
Growth and margins look like they improved over the second half of 2016, judging by the upbeat trading statement at the end of November, according to Berenberg.
Breedon derives around two-thirds of its revenue from infrastructure spending in the UK, around one-fifth from commercial projects and the rest from housing, so it would not be immune to any Brexit-inspired downturn.
For now, the impact of Brexit appears to be limited, however, and management appears upbeat about the infrastructure outlook.
Berenberg is tipping revenue hit £452mln in 2016, including a £125mln from recently acquired Hope Construction; Hope’s numbers have been integrated with Breedon’s for five months.
Its earnings before interest and tax (EBIT) margins are running a little below the 10% level, which Berenberg thinks will have the effect of trimming 1.5 percentage points off Breedon’s EBIT margin in 2017, but longer term the German bank thinks there is scope to lift profitability in the Hope business to a level more in line with the group average.
Furthermore, there is potential for more bolt-on acquisitions.
“We believe the buy-and-build strategy of the firm will continue and note that despite ending 2016 with c£184mln net debt we think the business will be almost in net cash by the end of 2019,” Berenberg said.
For 2016, Berenberg is now forecasting underlying earnings (EBITDA) of £85mln, rising to £114mln in 2017, when the contribution from Hope really kicks in.
On projected 2017 earnings per share of 3.9p, the shares trade on an earnings multiple of 18.3.
Berenberg rates the shares a ‘buy’.