It is always difficult to assess the true progress of a business when it is highly acquisitive and that is true of bricks and construction products supplier Brickability Group (LON: BRCK). The company is a consolidator. Four acquisitions since the end of the previous financial year have boosted the company’s performance so far this year, although management does say this is only part of the growth achieved.
There are 2.4 billion bricks sold in a year and sales are growing at around 2% a year. Brickability distributes the same volume of bricks as its two main competitors combined. That scale helps as does the ability to offer bricks from many manufacturers rather than just one manufacturer.
Housebuilders use the majority of those bricks and the government is trying to encourage more homes to be built. The number of households continues to increase. This provides a positive trading background for Brickability.
In recent years, Brickability has diversified its offering to include roof, flooring and other construction products.
The group strategy is to broaden the geographic coverage and cross-sell products to existing customers. There will also be further acquisitions in what is a fragmented market.
The customer base is in the UK. Brickability supplies bricks from UK and European manufacturers. The Towelrad towel rail products are predominantly produced in Turkey. Imports will be more costly following the decline of the pound. This could hamper progress, although brick imports have been rising because of a lack of UK supply. They account for 17% of bricks sold in 2018.
The key thing for management is to make sure that the group companies work together to maximise their potential. Trying to sell higher margin products to existing bricks customers is a sensible strategy.
The shares ended the first day of trading at 68p. This appears a reasonably attractive valuation, given the strengthening of the balance sheet. Maintaining the quality of acquisitions is important.
Brickability Group (LON: BRCK)
Bricks, roof tiles and construction products distributor
AIM placing and subscription
Flotation date: 29 August 2019
Issue price: 65p
Amount raised: £56.7m
Market capitalisation: £149.8m
Nominated adviser / brokers: Cenkos
What does it do?
Bridgend-based Brickability supplies bricks and other construction materials and the core customer base is national and local housebuilders and general builders. The history of the core business goes back to 1984 and there was a management buyout of this business in 2016. In the past 15 years organic growth has been added to through acquisitions, which have also diversified the range of products offered. The company operates from 25 sites in the UK.
There are three divisions. The first supplies facing bricks and paving. This is a distribution business and it is the leader in the market. There is a subsidiary that manufactures concrete products and brick arches. The top ten customers account for 53% of sales.
Good relationships with brick manufacturers help Brickability to gain access to bricks even when they are in short supply. Customers generally get better value by going through an intermediary rather than directly to the manufacturer.
The heating, plumbing and joinery division supplies towel rails, radiators, windows, doors and flooring. This part of the business was acquired in March 2018 and added to in April 2019. The growth in this part of the business is less impressive than for the other divisions.
The roofs division supplies concrete and clay roofing tiles. This division has grown its EBITDA by 50% over a two year period to £3.9m. The customer base is mainly housebuilders.
The placing raised £43.1m in cash after expenses and there was also the swapping of loan notes owned by management for shares that took the total to £53.7m net. Pro forma NAV is £71.1m and pro forma net cash is £4.7m. However, this figure does not take account of the £6.7m of additional debt paid for three acquisitions since March.
The ongoing interest charge will be reduced. The strategy is to keep long-term debt down to around 50% of reported EBITDA. That historically would be approximately £10m, but this will rise as EBITDA grows.
Dividend payments are planned and are likely to be three times covered by earnings per share. That suggests a potential 2% yield.
In the year to March 2019, Brickability made a pre-tax profit of £9.89m on revenues of £163.3m. The £4.2m finance cost will be reduced following the fundraising, but the company is already different because of further acquisitions.
The bricks division contributed £123.4m of those revenues and the majority of profit. The margins of the other two divisions are higher – both have an EBITDA margin of more than 20%, compared with 8.8% for bricks.
There is an LTIP where compound annual growth In EBITDA has to be at least 6% (for up to 50% of the total share award) and total shareholder return also has to achieve compound annual growth of at least 6% (for up to 50% of the total share award) in order to receive any shares. To receive the full number of EBITDA-related shares the compound annual growth has to be at least 10% and the same percentage is required for the total shareholder return-related shares. This is over a three-year time scale.
John Richards is non-executive chairman and he spent 31 years at Ibstock.
Annual fee: £75,000
Alan Simpson is chief executive and he has approaching four decades of experience in the building materials sector. He was a director of the core business for two decades prior to becoming chief executive after a management buyout.
Annual salary: £400,000
Stuart Overend is finance director and he joined the company in May 2018. He has previously been involved with a pharma company and a private equity fund.
Annual salary: £275,000
Clive Norman is a non-executive director and he is chief executive of boilers producer Ferroli and vice president of Delonghi Heating.
Annual fee: £50,000
David Simpson is a non-executive director and he has a background in the housebuilding sector.
Annual fee: £55,000
Giles Beale is a non-executive director. He is a corporate lawyer with mergers experience.
Annual fee: £55,000
There is deemed to be a concert party involving Alan Simpson, John Richards and Clive Norman, plus other management, which owns 48.8% of the company. Alan Simpson owns 15.9% and the next largest shareholder is Paul Hamilton with 13.4%. Richards owns 2.6% and Norman, who sold a business to the group, 2.4%.
Stuart Overend is the only other director who owns shares and he holds 1%. The total shareholding of directors is 27.9% and David Simpson invested another £100,000 in shares following the commencement of trading on AIM.
Directors, management and other shareholders have agreed not to sell shares for 12 months after admission. This relates to 67.4% of the shares, including MBO-backer Promethean UK Opportunities Fund II’s stake of 12.6%. Arnold Van Huet owns 4.2%.
New institutional shareholders came on board at the time of the float. Liontrust has taken a 9% stake, Blackrock 4.6% and Soros Fund Management 4%.