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Breedon Group PLC's profits surge in "transformational" 2016

The group said the integration of Hope is well advanced and synergies have accelerated.
Hope Construction Materials lorry
Hope chipped in with a five month contribution

Construction materials group Breedon Group PLC (LON:BREE) saw its trading performance transformed in 2016 by the acquisition of Hope Construction Materials.

Hope contributed to five months of 2016, burnishing an already good performance from the former Breedon Aggregates business.

The group said the integration of Hope is well advanced and synergies have accelerated.

The group's profit before tax shot up 50% to £46.8mln from £31.3mln in 2015, while underlying earnings before interest and tax (EBIT) soared 58% to £59.6mln from £37.8mln.

The EBIT margin rose to 13.1% from 11.9% the previous year, heading towards the group's stated target of reaching 15% by 2020.

Revenue rose 43% to £454.7mln from £318.5mln.

Market conditions proved to be very resilient in 2016, with volumes of almost all major construction products ahead of the prior year, Breedon said.

Net debt at the end of the year stood at £159.3mln, compared to a positive net cash position at the end of 2015 £10.3mln.

The change in the debt position reflects the acquisition of Hope and also the purchase of Sherburn Materials towards the end of the year.

The group remains cash generative, and at 1.9 times annual underlying earnings (EBITDA) the debt is below the 2.0 level that is often used as a covenant test in banking facilities.

Breedon does not presently pay a dividend, believing the money is better used growing the business, both organically and through selected earnings-enhancing acquisitions.

"As we look ahead, the government appears to have finally committed to substantial investment in the UK's infrastructure and this, coupled with anticipated growth in the private housing market, is expected to bring significant medium- and long-term benefits to our business," said Peter Tom CBE, executive chairman of Breedon.

Tom conceded there would likely be a period of uncertainty until the UK's exit terms from the European Union have been determined, but said Breedon had demonstrated its ability to thrive in adversity.

“Uncertain conditions always create opportunities,” Tom said.

In a presentation of the company's results, Tom concluded: “We thrilled to be able to announce a good set of results and this really has created a platform for us going forward."

Guidance for fiscal year 2017...

Group finance director Rob Wood said the company is comfortable with the market consensus for underlying EBIT of £76mln to £77mln in fiscal year 2017.

The group expects net debt to fall between £120mln-130mln at the end of 2017, less than consensus forecasts of £140mln to £150mln.

Capital expenditure is expected to reach £45mln, compared to anlaysts' estimates of £43mln, as the group continues to invest in its future.

What the brokers said... 

Peel Hunt said given its healthy growth profile it has reiterated a 'buy' rating on the stock. 

"The full-year results were once again a bit better than expected with the integration of Hope, as well as the organic operational performance all going well," the broker said.

"Net debt has improved a little faster than expected and the group remains confident it can continue to find investment opportunities over the medium term."

Numis was also positive on the results, saying full year pre-tax profit was some 2% ahead of its estimates. The broker reiterated an 'add' rating and a target price of 82p. 

"Good figures and the confident statement from Breedon both about the wider market and group prospects are welcome, and we believe the scope for upside in estimates remains on both an organic and acquisitive basis," Numis said.

"The shares stand at a premium rating to our materials and merchants sector but based on target margins and ongoing scope for operational outperformance we expect sustained organic double digit growth in earnings which will enable the group to continue to outperform."

Breedon is the UK's largest independent construction materials group after agreeing in 2015 to buy Hope for £336mln on a cash-free and debt-free basis. The company changed its name from Breedon Aggregates after the acquisition, which was approved by the Competition and Markets Authority last July, to reflect that its business has moved beyond just aggregates. 

Shares rose 1.87% to 78.95p in afternoon trading.

-- Adds guidance for 2017, broker comments and background information, updates share price -- 


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