• Construction materials company with focus on the UK and Northern Europe
• Currently has 11 quarries and 26 operational sites
• Berenberg target price at 159% premium
What SigmaRoc does
SigmRoc PLC (LON:SRC) is a construction materials company with a buy-and-build strategy focusing on assets in the UK and Northern Europe.
Founded in 2016, the firm looks to create value by purchasing assets in the fragmented construction materials market and forming them into larger groups to create efficiencies.
These assets are segmented into regional ‘platforms’, of which there are currently three, all in the UK. In total, the group operates 11 quarries and 26 operational sites with over 100mln tonnes of reserves and resources.
What it owns
The company’s operations as of 18 April 2019 consist of:
• Ronez: A concrete and asphalt firm based in the Channel Islands consisting of the St John’s Quarry in Jersey and Les Vardes Quarry and Vale Castle in Guernsey
• Allen Concrete: A precast concrete product maker with plants in Surrey and Northamptonshire
• Poundfield Products: Suffolk-based precast and prestressed concrete manufacturer
• CCP Building Products: Supplier of concrete and aggregates (materials including sand, gravel and crushed stone). Has manufacturing facilities in North West England and North Wales
• Foelfach Quarry: Crushed aggregate and stone quarry in Carmarthenshire, Wales, containing some of the home nation’s highest quality aggregate reserves. The quarry also produces high-polished stone, a valuable material for road surfacing
• GD Harries (GDH): 40% stake in GDH, one of Wales’s largest independent suppliers of aggregates. Operates seven hardstone quarries, six concrete plants, three asphalt plants, a wharf operation and four road-contracting units
- In its results for 2018, the group reported an underlying pre-tax profit of £5.5mln, 113.8% higher than the prior year, while revenues jumped 52% to £41.2mln
- In mid-April, SigmaRoc paid £4.89mln for its 40% stake in GDH, with an option to acquire the remaining 60% for £7.5mln before 31 August 2020. The company expected the acquisition to be “immediately earnings enhancing”
- The company has appointed Tim Hall, the former chief executive of construction materials group Breedon South, as a non-executive director. Breedon South is a division of AIM 100 firm Breedon Group PLC (LON:BREE), which operates around 80 quarries in the UK and Ireland
Speaking to Proactive about the GD Harris acquisition, SigmaRoc’s chief executive Max Vermorken said the company was likely to exercise the option to acquire the remaining 60% stake in the company “between [April 2019] and mid-2020” when the option expires.
For the rest of the current year, he said in January that the next step of the company’s expansion strategy would be to gain a foothold in mainland Europe, having already established a network of businesses in the UK.
“That’s been our ambition for a while,” Vermorken said, adding that the firm “wanted to create a base [in the UK] first and get a bit of recognition and presence to ensure shareholders that we could run a good business.”
“What we now need to do is make a start in Europe.”
The first part of this goal will be to develop a fourth platform in Northern Europe just on the opposite side of the English Channel.
Verkmorken said that there is “plenty to go at” when it comes to potential acquisitions, with the company already in discussions with potential targets.
“Some of our targets are friends, connections and former colleagues from years before … it takes a long time to get the right target for the right price, but we don’t think that’s a problem as we’re doing that with six or seven targets at any one time.”
In the longer term, the main aim is scale and size with fifth and sixth platforms to follow “fairly soon after” the fourth.
“We’re able to grow [earnings per share] quite significantly each time we buy something, and that’s on a fully diluted basis … as long as we can keep doing that it creates value for everybody.”
He adds that with the company getting “significantly larger over time” with each acquisition, eventually Sigma will be able to self-fund its expansion and there will be no dilution for shareholders.
However, Vermorken says that the company doesn’t just chase deals for the fun of it, there are “significant” internal hurdles to approving purchases.
These include making sure the purchase is “earnings enhancing on a fully diluted basis no matter what” and that there is sufficient asset backing for the acquisition as the firm is more focused on cash generation than rapid growth.
What the brokers say
In a note in April, analysts at Berenberg said with the GDH acquisition SigmaRoc had “once again negotiated well for a good business”.
The broker added that the appointment of Tim Hall to the board would “benefit SigmaRoc’s growth in the UK aggregates and construction materials market” thanks to his knowledge and network within the industry.
Berenberg is also expecting “significantly better profits” from the company through cost controls and better operating practices among its acquired companies, while demand for its products in the UK and the Channel Islands “should remain strong”.
“SigmaRoc’s strategy of purchasing assets from the major materials producers and small private owners is well timed, in our view. As illustrative figures, we calculate that SigmaRoc can grow a £700mln business by raising £160mln in equity and £50mln in debt, using its completed deals as a guide. The pipeline of potential future acquisitions should generate significant value.”
Berenberg rates SigmaRoc with a ‘buy’ rating and a price target of 105p, a 159% premium on its 4 September close price.
With shares currently trading at around 40.5p as of 5 September, SigmaRoc has a market cap of £70.4mln.