SigmaRoc – looking for a 32% price uplift within the next few months
The concept of the ‘buy-to-build’ model has been very well exampled by SigmaRoc (LON:SRC) to date.
Its Management has the strategy to target and acquire construction materials assets in both the UK and in Northern Europe.
Through active management it seeks to extract operating efficiencies in the companies that it acquires.
By building up a larger group it creates value out of acquiring companies in the fragmented construction materials market.
Quite a score - 11 and certainly not out
Over the last six years it has made some 11 acquisitions as it aims to build a significant Northern Europe focused quarried materials group.
It has sought out companies with substantial assets, where greater efficiencies could bear fruit.
To date every acquisition has been made on the basis that it can stand on its own two feet and not just be a route to market.
Historically in this sector, standalone business have been purchased due to their individual success, often to only become routes to market and have their value eroded.
Instead SigmaRoc has a decentralised business model that allows it to ensure that all its product and service offerings perform the best they can, leveraging group opportunities where it is in their best interest.
That has allowed the company to build up a competitive construction materials group focussed on the long-term benefits that its industry has to offer.
Invest, improve, integrate and innovate
The group seeks to abide by its four core principles –
· Only in businesses with solid intrinsic value;
· Only in businesses with the potential to be improved and grown;
· Only in businesses which can be bought at an attractive valuation.
· The motivation of management to drive growth;
· The ultimate offering to the local market and community;
· The operational and financial performance of the business.
· By building platforms of compatible businesses;
· By unlocking those synergies which do not come at a significant cost;
· By recognising the value of what previous owners built.
· By providing product and service solutions to current and future problems;
· By embracing technological advance within the running of the group’s businesses;
· By challenging the status quo to drive those businesses and industry forward to meet social and environmental challenges ahead.
So far, these principles appear to be setting a strong future course for the expanding group.
The Expanded Equity
As the group has progressed with its ‘buy-to-build’ strategy it has substantially increased its equity. There are now some 638m shares in issue.
The larger holders include Blackrock Investment Management (12.34%), Rettig Group (7.88%), M&G investment Management (6.79%), Chelverton Asset Management (6.45%), Ninety One (6.40%), Janus Henderson Investors (6.05%), Polar Capital (5.34%), Canaccord Genuity Wealth Management (5.29%), BGF Investments (5.26%), and Premier Fund Managers (4.43%).
That really is a very impressive list of institutional investors and very capable of committing further funds should investment support be required in any future suitable acquisition.
The Recent Trading Update
At the end of July, the group issued a Trading Update for its first half-year to end June – it showed a very positive momentum.
In H1 the group revenue was £248m, up 18% on a like-for-like basis. Its underlying EBITDA was 6% better at £48m, while its earnings were 35% better at 3.5p per share.
Apparently trading in the early part of this second half has started well, with the group benefitting from its broad end market and geographical diversification.
Encouragingly it has remained good for both housing and infrastructure-related demand, as well as for industrial minerals.
It is impressive that the group has successfully dealt with the various supply chain and inflationary headwinds in H1 2022, with further improvement initiatives planned for H2 2022.
Max Vermorken, CEO, stated that:
"To state the obvious this was a first half unlike any other, yet the group performed extremely well. Input cost increases were managed and further cost reduction initiatives were implemented. We closed H1 2022 with a strong performance and remain encouraged by the demand outlook in all segments for the months ahead.
Our focus remains squarely on developing our group in terms of products and geography and we remain very confident in delivering good financial and strategic progress both in the current year and over the medium-term."
Broker’s View – objective of 130p
Analyst Charlie Campbell at Liberum Capital, one of the group’s joint brokers, has a ‘Buy’ out on the shares, with a price objective of 130p.
He considers that the shares look very cheap, with the market underestimating the group’s resilience in its cash flows, in its geographic diversity and end market exposure.
His estimates are for sales to almost double from £272m to £510m this year, taking account of the recent major acquisitions. He sees pre-tax profits more than doubling from £26.8m to £59.0m, lifting earnings up from 5.0p to 6.6p per share.
For the next two years his figures are for £528m then £545m in sales in 2023 and 2024 respectively.
With profits rising to £63.3m then £68.2m in those years, worth 7.1p then 7.7p per share in earnings.
My View – looking for a quick 32% uplift
On Monday 12 September, when the Interim results are due to be announced, I would hope that Vermorken will be even more positive about current year trading.
The group’s shares were trading up at 114.65p almost a year ago, it may well take a while longer for them to return to those levels.
However, at the current 56.5p, I do agree with Charlie Campbell that they are very cheap trading on just 8.6 times their current year price-to-earnings ratio.
A lift-up to touch the 75p level, last seen at the end of April this year, is more than possible with the help of a changing market sentiment, perhaps after the Interims.
And that would be a neat 32% advance from today!
(Profile 04.09.20 @ 49p set a Target Price of 65p*)
(Asterisks * denote that Target Prices have been achieved since Profile publication)