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Breedon Aggregates riding the upturn in the construction sector

This week’s annual results from Breedon Aggregates beat expectations – but also revealed just how far the company had travelled under the stewardship of chief executive Simon Vivian and his team.


This week’s annual results from Breedon Aggregates (LON:BREE) beat expectations – but also revealed just how far the company had travelled under the stewardship of chief executive Simon Vivian and his team.

Those who have followed the story will know that the base Breedon business was bought out of administration for a pound in 2010 with debts of around £160mln.

This was an operation that over-geared and was hit by the economic downturn that followed the financial crisis.

The prelims revealed Breedon generated revenues of almost £270mln from quarrying and shipping aggregates, asphalt and concrete to construction sites throughout the UK.

And a total of £38.5mln of that was converted to earnings before interest, tax, depreciation and amortisation (EBITDA).

This represents a doubling in top line growth since 2010 and a near three-fold increase in EBITDA.

Over the same period margins improved to 14.3% in this period from 9.5%, while gearing reduced to a very manageable 1.7 times EBITDA, or £66.3mln.

The company is sitting on 66-years of reserves and resources.

In the last four years Breedon has made eight acquisitions, although the underlying business has grown at a decent clip over that period too.

It is fair to say the latest results reveal a company that is in rude financial health. The share price also reflects this bounce back to vitality, rising from 12p to almost 50p today, valuing the business at £500mln.

This is good news for early investors such as the Neil Woodford-backed Invesco fund that got behind the Vivian-led Breedon team, taking a £20mln stake at the start of the journey.

Woodford, who has a habit of picking winners of this ilk, is a two-time Breedon backer with his new fund owning a 13.5% stake in the business.

Those new to the stock might be forgiven for thinking that this particular train departed the station several years ago.

However, Vivian and chief financial officer, Rob Wood, argue that momentum behind the business will continue for some years – only time will tell if the shares follow.

They point out the prospects for construction have never been better.

Major initiatives such as London’s Cross Rail are well underway and the high-speed link to Birmingham is next. At the same time the housing market is in fine fettle as set to grow by around 10% this year.

The momentum is expected to continue for a few more years. The company’s presentation reveals that activity, which started rising in early 2013, is still a long way short of pre-recession levels.

Remember also the progress to date has been achieved against the backdrop of some fairly sketchy economic conditions.

One wonders then just what can be achieved with a tailwind.

Breedon own 53 quarries, 27 asphalt operations and 60 ready-mixed concrete and mortar plants.

But with around 6% UK share it is a minnow when compared with the sector leader Tarmac-Lafarge on 30%.

However, it is big enough to meet the requirements of some fairly large customers – and in Scotland actually boasts Tarmac’s sort of market share.

There are structural changes taking place in the UK – assets are being swapped and sold by the big players who are happy to divest large, capital intensive businesses to invest elsewhere around the world.

It was a beneficiary of divestments by Aggregate Industries and paving firm Marshalls – and there could be other deals on offer.

At the same there are time barriers of entry to this market. It is almost a quarter of a century since planning permission was granted for a new rock quarry in the UK. So it is nigh impossible for a newcomer to grow organically from scratch.

This is why Breedon under Vivian has acquired small, often family-owned operations, aiming to improve profitability, output, reserves and resources.

Vivian and his colleagues have successfully delivered on their buy and build strategy.

Cash generation is such that it has enough headroom to make two or three acquisitions this year for a total of around £30-£40mln, while investors would back the business to buy something larger if a deal comes along, the CEO revealed.

A dividend won’t seriously be contemplated until the business runs out of opportunities to increase its portfolio.

Vivian told Proactive Investors: “We will consider a dividend when we think we have taken the growth story as far as it can go.

"When we think there is no opportunity to re-invest that money in acquisitions we will start paying a dividend. The board reviews this option continuously.”

The City broker Peel Hunt is predicting EBITDA will grow by 18% to £44.8mln this year and then to £51.2mln – though these figures don’t incorporate the impact of acquisitions that might be made in this period.

As analyst Clyde Lewis pointed out: “The outlook for the UK heavy-side building market is good, because of increased infrastructure spending plans.

“This, combined with further market share gains and a flow of acquisitions, will see Breedon continue to grow faster than its peers.”

Quick facts: Breedon Group

Price: 81.3 GBX

Market: AIM
Market Cap: £1.37 billion

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