Big-spending Breedon blasts off

Operating quarries and running cement and ready-mixed concrete plants is dirty work, but where there's muck there's brass, and £700 million Breedon Aggregates is certainly throwing the cash about. Paying £336 million for rival Hope Construction Materials will make it the UK's largest independent building materials group. It's a truly transformational deal, and one which should rightly put the company on investors' radars.

Breedon shares have risen almost fourfold since late 2011, and are up about 7% on the back of this acquisition alone. Given the scale and nature of the deal, further upside is widely predicted. Indeed, the company points out that the industry is in fine fettle.

Alongside this announcement, Breedon said sales volumes were up sharply in the 10 months to 31 October and that revenue had soared by 22% to £274 million. Underlying cash profit for the full year is tipped to be at the top end of current market expectations for £50-£53 million.

"This acquisition is well-timed, with UK construction output forecast to expand by around 15% over the next four years and volumes of all our major products expected to grow strongly," claims executive chairman Peter Tom.

House broker Peel Hunt is understandably bullish. That said, the reaction has been universally positive, with justification. Hope, a collection of businesses bought by the Mitall family from Lafarge in 2013, owns a huge cement works in Breedon's home county of Derbyshire, a rail-linked quarry and national network of depots. It made an underlying cash profit of £37 million in the year to June on revenue of £285 million, and Breedon reckons it can find £10 million of annual cost savings within three years.

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And expectations that Hope will deliver a double-digit benefit to underlying earnings per share (EPS) in the first full year after completion has Peel Hunt reaching for its calculator. The broker thinks earnings estimates for 2016 will increase by 10-15%, and by a hefty 35% for the year after to 3.3p and 4.7p respectively.

Of course, the deal will need to get past regulators at the Competition and Markets Authority, although there shouldn't be any issues and the deal is expected to wrap up next June. Breedon is paying £202 million in cash for Hope, part-funded by a £41 million share placing at 51.79p, and the rest in shares. That will elevate gearing to about 50%, with net debt/cash profits of 2.5 times, although that's not particularly onerous and does leave room for further deal-making.

"While investors will now ascribe a lower PE [price/earnings] multiple to the bigger group, we still expect to see good upside in the shares over the medium term," writes Peel Hunt. "We are raising our target price to 75p - based on a PE of 16x and an EV/EBITDA of 9.0x for 2017E."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.