Our columnist measures up an acquisitive building supply stock.
In April 2020, I drew attention to AIM-listed Brickability (LSE:BRCK) with a ‘buy’ stance, after a director bought £100,000 shares at 46p.
This supplier of bricks and other building materials had floated in August 2019 at 65p but traded sideways, then fell with the Covid-19 wider sell-off. I thought construction and house-building ought to be early beneficiaries of government support.
Wants to be the UK’s leading building materials supplier
This group is acquisitive, which raises risk, but it appears to have had plenty of practice since founding in South Wales in 1984.
There are three main divisions of materials supply: bricks, roofing products and heating and plumbing/joinery. A 2016 management buyout had been funded by private equity group Promethean, which cut its stake at flotation at 65p and left completely in February 2020.
You do need to look critically where private equity sells down, but their modus operandi is re-investing in unlisted companies rather than becoming portfolio managers.
A net £54 million was raised to cut debt and help grow UK market share from about 12%, with the objective to become the leading supplier of materials to housebuilders. All that from a base of £14 million underlying profit on £140 million revenue at flotation, and it achieved £500 million revenue in five years.
On the rise since November
Last September I re-iterated ‘buy’ after annual results to 31 March and the price having eased from 55p back to 46p. Springtime disruption meant flat revenue, despite seven acquisitions made, but the operating margin was holding around 11%.
Overall, the stock appeared a useful means to capitalise on Boris Johnson’s plan to boost housebuilding to more than 30,600 new homes a year.
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Until there was more evidence of underlying progress, the stock took its cue from November’s Covid vaccines-led rally, taking the stock up to 102p currently.
When a circa £230 million company is busily making acquisitions, it is hard to discern the underlying trend also make projections. Management only needs to get its timing right on a deal or two to beat expectations. Yet Brickability’s recent trading updates appear to reflect a strong industry.
Interims asserted a V-shaped recovery
With its markets firming up, the board was confident to reinstate market guidance for the full year to March 2021 – of at least £15 million adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), a measure close to operating profit.
First-half numbers to 30 September were understandably down after springtime disruption: pre-tax profit by 17% to £5.4 million on revenue 23% lower at £75.3 million.
But helped by strong cash conversion of profit, a 0.9p a share interim dividend was paid, costing around £200,000 in context of the balance sheet, showing £13.8 million cash, £16.3 million debt and £5.5 million lease liabilities.
A 9 February update then cited no negative impact on trading from Brexit and guided full-year EBITDA up to “at least £16 million” amid strong order books. That was raised, barely 10 days later to “over £17 million on £180 million revenue” if likely helped by acquisitions.
McCann Logistics, for example, has provided Brickability with its own pan-European transport network.
A 30% discount for first-time home buyers should help
Today’s news from the government that first-time buyers will get a 30% discount on new homes will cause despair among those who critique the Tories for relentlessly boosting housing – if not prices.
But housebuilders must be gleeful at this latest scheme, able to save buyers six-figure sums, as further support.
It would appear that unless a major upset on inflation triggers emergency higher interest rates, and/or unemployment soars, housing demand is set to remain strong.
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Recent consensus forecasts on Brickability have anticipated £10.6 million net profit this latest year rising to £14.3 million in the March 2022 year, for earnings per share (EPS) of 5.3p and 6.2p respectively, also a circa 2p dividend edging up.
That implies a forward price-to-earnings (PE) ratio in the mid-teens with the payout essentially affirming cash conversion than much yield.
Perhaps government support for housebuilding is substantially decreasing its cyclical nature. I would still be cautious at assuming a building supplier’s stock warrants a classic growth rating around 20x – were you to see that (and on other cyclical) it would be a sign to take profits.
Oversubscribed £53 million net placing
This is another dynamic clouding per share projections. This week, 58 million new ordinary shares were placed with institutions at 95p, raising £55 million net at the cost of nearly 20% dilution. It is mitigated by a technically high price, and looks like an intelligent move in support of development.
Such is current institutional demand for exposure to housebuilding, Brickability insiders sold a total 40 million shares, also at 95p, in a secondary placing.
Sceptics might say they lack confidence in the duration of this building boom. Yet in smaller companies the only time major holders can take profits is when demand exists. Also, it reduces management’s holding from 54% to 28%, which will more likely get approval from institutions as they dislike being in ‘controlled’ companies.
Brickability Group - financial summary
Year end 31 Mar
|Turnover (£ million)||11.7||163||187|
|Operating margin (%)||1.1||11.2||10.7|
|Operating profit (£m)||0.1||18.2||19.9|
|Net profit (£m)||-0.3||6.5||9.3|
|EPS - reported (p)||-0.1||4.5||4.8|
|EPS - normalised (p)||-0.1||4.5||4.8|
|Price/earnings ratio (x)||9.4|
|Operating cashflow/share (p)||0.3||8.2||4.3|
|Capital expenditure/share (p)||0.6||1.4||5.4|
|Free cashflow/share (p)||-0.4||6.8||-1.1|
|Net debt (£m)||65.2||50.7||-2.4|
|Net assets (£m)||8.1||16.4||80.1|
|Net assets per share (p)||3.5||7.6||34.8|
Source: company accounts
£63 million acquisition of Taylor Maxwell Group
This is the chief driver for the placing, which management has had its eye on for some time. With over 60 years’ experience in supplying façade and timber products, Taylor Maxwell operates from 16 regional locations across the UK and has minimal overlap with Brickability’s existing customer base. Cost and revenue synergies are promised, besides transforming the group’s scale.
Management has also identified five potential acquisitions by way of a renewable energy specialist, a flooring company, two roofing contractors and a brickwork/stonework contractor.
I have a slight sense of déjà vu from the late 1980s housing boom after fiscal policy was relaxed: it encouraged a flurry of acquisitive construction companies, also in building supplies.
Shareholders did very well as deals boosted EPS, but it all led to increasingly opportunistic, debt-funded takeovers. Such companies then hit a wall of the early 1990s downturn and higher interest rates – the highest-profile example being C.H. Beazer, which ended up rescued by Hanson plc in 1991 and whose rump is nowadays within Persimmon (LSE:PSN).
Around 30 years later, directors are probably more disciplined and an acquisitions strategy can still make sense. The outlier risk remains, of any shock rise in interest rates pulling the rug from buoyant conditions in housing.
New chief financial officer
One key reason 1980’s acquisitive companies went off the rails was a focus of power at the top – of a combined chairman/chief executive role. The 1992 Cadbury report on corporate governance recommended against this, and for non-executive directors to help better balanced decisions.
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The chief financial officer (CFO) is also a key individual for success of an acquisitive strategy.
Unfortunately the death of the previous incumbent Stuart Overend last November from a sudden illness meant an interim replacement early last January.
Yet the board has been pleased with Michael Gant, “who has made a very positive contribution since joining”, and his role has become permanent. Previously he held a CFO position at Walker Greenbank plc (now Sanderson Design) and before that was a finance director at Britvic.
I temper my stance from ‘buy’, but do not take this negatively as a downgrading. Brickability could enjoy more years of prosperity and end up acquired itself. Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.