Stockwatch: building a stake in this acquisitive share

Our companies analyst believes virtues could outweigh risks at this acquirer. Directors are buying too. 

Is this a sensible “buy-and-build” stock? At 51p, AIM-listed SigmaRoc (LSE:SRC) is a £122 million acquisitive construction materials group that has rapidly come together. 

Four key acquisitions were made in 2019: CCP Building Products, a 40% holding in GD Harries quarries in Wales, plus Carrieres du Hainaut and Stone Holdings in Belgium. Ready-mix operations also opened in Jersey. Transactions continue apace with full control of GDH happening this month. 

Beware that being acquisitive in building materials has history  

I have a sense of déjà vu here having followed C H Beazer plc in the 1980s that ended up a case study of a company becoming overstretched – albeit having diversified into house-building – and being rescued by Hanson plc. Beazer, similarly, embraced aggregates, buying the second-largest such business in the US after acquiring the fourth-largest US cement producer. Hanson swallowed the building materials side and sold on Kier (LSE:KIE) construction, which remains listed. 

This time around the executive chairman looks as if he knows to stay reasonably focused and also when to sell on. David Barrett, along with the CEO and technical director, founded SigmaRoc only a few years ago. His track record includes co-founding London Concrete in 1997, which expanded to more than a dozen plants, becoming the capital’s leading concrete supplier for major projects. 

Barrett sold that business to Aggregate Industries, a subsidiary of Lafarge-Holcim, the world’s biggest construction materials supplier. He could therefore achieve something similar here. However, be aware of “key person risk” given the other executives look like young lieutenants.   

Hope there is no repeat of the 1980s mistakes  

After too many acquisitive groups failed, the 1992 Cadbury report on corporate governance recommended the executive chair role be split as a check on overstretch – it’s why nowadays we see non-executive chairs alongside a CEO. Some people felt this went too far regarding smaller companies where an executive chair is indeed more appropriate. Be aware also that we are 30 years from seeing where opportunistic acquisitions can end up, especially if the sector also happens to be cyclical.  

More positively, a Conservative government is intent on public infrastructure spend, partly for its “levelling up” agenda in the North and also to counter the recessionary effects of Covid-19.  

I therefore think that if SigmaRoc’s boss can oversee a prudent “buy-and-build” strategy, then its risk/reward profile tips favourably. Anticipation of this also explains why the share price has now recovered all of the losses suffered during the Covid sell-off.  

Much depends on forward projections  

A share price at 51p represents 23 times market expectations for normalised earnings per share (EPS) of 2.2p this year, or near 12x the 2021 projection for 4.4p. These are based on substantially greater net profit of £5.9 million, rising to £11.9 million. However, last October’s placing of 79.9 million shares at 41p, diluting the share capital by 46%, has impacted per share values. Mind, it is also very difficult to discern underlying growth rates until smaller acquirers are big enough to publish true comparative performance. 

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The strategy appears to include continental Europe, and owning subsidiaries there may obviate Brexit issues arising. Yet, with a hard Brexit now a serious risk, I am surprised that as a fundamentally UK-European group, SigmaRoc has nothing to say about possible effects and planning for the end of the UK’s transition period. This could affect forward price/earnings (PE) assumptions.

Acquisitive boost for 2020 interim results and operations bode well 

First-half results benefit from blue limestone supplier Carrieres du Hainaut: operating profit is up 84% to £15.2 million and pre-tax profit by 51% to £5.3 million, on revenue up 83% to £54.5 million. Notice that underlying EPS is flat at just under 2p. Most impressively, the operating margin has continued to edge up, to 28%, affirming good choice of acquisitions made. 

Ronez in the Channel Islands began 2020 well in terms of projects in hand, however, lockdown restrictions were harsher in Guernsey than Jersey, with a near-total shutdown during April. Normal trading resumed by end-June and the second-half outlook is said to be promising due to a full programme for Jersey road reconstruction. There are also further housing and commercial schemes. 

There are two manufacturers of precast concrete products: SigmaPPG, which enjoyed a 26% jump in revenue, helped by production continuing throughout the pandemic with demand accelerating lately. And also Ipswich-based Poundfield, which advanced from an already strong order book, helped by some large bespoke projects.  

CCP Building Products supplies concrete blocks and limestone aggregates in the North West and North Wales. It suffered a Covid-19 slowdown in April but was profitable throughout and demand has normalised.  

Carrieres du Hainaut, Europe’s biggest ornamental limestone quarry, started 2020 with strong demand for bluestone and aggregates. Covid-19 then caused activity to halve, yet the business was kept operating with normal trading achieved by mid-May. Prompt management of the crisis has helped first-half sales up 10%, supported by market share gains. 

GD Harries, one of Wales’s largest suppliers of aggregates from six quarries, also in civil engineering, saw its asphalt and construction materials “heavily affected” by Covid-19, only returning to normal trading in July as local road construction resumed. Given the 40% stake was accounted for on an equity basis, its contribution should now rise under full ownership. Quarries do look like attractive assets given that they must be tricky to replicate versus environmental restrictions nowadays. Yet construction demand for aggregates will continue in the long run.  

This operations review therefore bodes well in terms of businesses acquired and management’s adept responses to Covid-19. The outlook is for recovery trends experienced through the third quarter to continue. “With the benefit of the GD Harries acquisition, progress could be further accelerated by a continued recovery in end-market conditions in 2021,” says SigmaRoc. 

Balance sheet has some classic amber lights  

The results highlights emphasise cash is up from £3.6 million to £17.3 million, June to June, a £7.4 million increase over the six months due to robust trading and careful/effective cash management. It also highlighted the ratio of net debt to underling EBITDA easing slightly from 2.1x just under 2.0x.  

Mind, however, from the balance sheet that intangible assets constitute 42% of £108.2 million net assets and there is £63.8 million debt, chiefly long term, with £17.3 million cash implying net gearing of 43% or 74% if you want to take a net tangible assets’ view. 

Trade payables are 1.83x trade receivables. Such imbalance is a longstanding bugbear of mine: you wonder if it mainly reflects the business set-up, or whether profits are enhanced by late payments to suppliers. It can typify aggressive plc management, although considering the spread of businesses in a group only recently put together, it would imply a lousy payments’ culture across the industry and in Belgium also. Still, last year’s ratio was much lower at 1.2x. 

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The dynamics of trade-and-other receivables help explain the turnaround in operational cash flow from near £3 million absorbed in the first half of 2019, to £11.7 million generated. An increase in profit also the add-back of depreciation charge rising from £2.2 million to £5.3 million, were other drivers. 

Bosses make regular cash purchases of equity 

Only last July, with the share price at around 41p, the chairman added 40,000 shares to own 2,380,640, or 0.9% of the company. The CEO added 25,644 shares to own 500,902, or 0.2%, and the technical director 11,737 shares to own 181,563 or 0.1%. 

They, and the chief financial officer and directors of group firms, had bought materially at around 43p in early March, similarly at 50p early in 2020. I like such partnering with outside investors instead of “equity” usually comprising risk-free options nowadays. A year ago, 8 million options were indeed spread around the top people with an exercise price of 46p, but they keep averaging into the shares with cash. Despite Covid-19 confusing the outlook, this should give confidence to buyers around current prices. 

So long as you respect that acquisitive development means inherently higher risks, SigmaRoc’s strong operating margins make it an interesting bet on the coming years’ evolution. For enterprising investors: Buy.  

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.