Brickability Group – Time to Build Value?

Next Monday (28 November) will see the announcement of the interim results for the six months to end September from the Brickability Group (LON:BRCK).

Despite the upward direction of interest rates and the easing of UK house prices, each of this group’s business divisions are growing currently.

The halfway figures and accompanying statement will show how undervalued the shares of the group are, relative to its near-term prospects.

The Business

The company is a leading construction materials distributor, serving customers across the UK and Europe for over 36 years through its national and local networks.

It supplies over 550m bricks annually and has over 55 locations across the country, with over 600 employees.

The company is the market leading supplier of facing bricks, blocks, rain screen cladding systems, architectural masonry, ceramic paving products, roof tiles and slates to the construction industry, supplying superior quality and strategically important building materials to house builders, developers and contractors along with private and commercial sector specifiers.

Its Operations – Offering Scale

The group’s segments include Bricks and Building Materials; Heating, Plumbing and Joinery; and Roofing Services.

The Bricks and Building Materials segment takes in the sale of building materials to all sectors of the construction industry, including national house builders, developers, contractors, general builders and retail to members of the public. This side covers 17 businesses operating from 49 sites across the country. It represented 88.9% of the group sales, which were £520.5m, to end March 2022.

The Heating, Plumbing and Joinery segment covers the sale of joinery materials and the distribution of radiators and associated parts and accessories. With seven businesses operating from five sites, this division handled 7.1% of the group sales.

The Roofing Services segment incorporates the supply of roofing construction services, primarily within the residential construction sector. Five businesses operating from four sites, it accounted for 4.1% of group sales.

The group has a regional sales network, offering a national coverage. It sources not only from the UK but also from abroad. With such a coverage and sales scope, it has the advantage of scale and buying power.

It has the ability of making National Agreements with its top name customers, while offering local delivery.

On a Sales per Region basis the UK covered 99.5% of the total turnover, while Europe took in the balance.

The Equity

There are some 300m shares in issue, with larger holders including Octopus Investments (17.0%), Liontrust Asset Management (9.91%), Promethean Investments (9.67%), FIL Investment Advisers (5.34%), Otus Capital Management (4.21%), Amati Global Investors (4.19%), Ruffer (3.17%), SFM UK Management (3.08%), Canaccord Genuity Wealth (2.89%), and Quilter Cheviot (1.95%).

Three of the group’s directors have significant equity holdings, Alan Simpson (11.2%), Paul Hamilton (10.3%) and Arnold van Huet (3.34%). Sarah Simpson holds 9.48m shares (3.16%).

Trading Update Indicates Strong First Half

The company updated investors stating that revenue for the first half is expected to be around £353m, which would be an increase of 58%. While the company anticipated adjusted EBITDA of at least £25m (£18m).

It reported that performance for the six months continued to be strong, with sales and profit growth across each of its four divisions, notwithstanding continued high energy costs and inflation.

Broker’s View – an excellent buying opportunity

Analyst Andrew Gibb at the group’s brokers Cenkos Securities, rates the shares as a Buy.

His estimates for the current year to end March 2023 are for sales to rise to £612.6m (£520.2m), with adjusted pre-tax profits improving to £39.5m (£34.7m), lifting earnings up to 10.6p (10.1p) per share, more than triple covering a 3.2p (3.0p) dividend.

For the coming year he has pencilled in £652.3m revenues, £42.1m profits, 11.2p earnings and a 3.4p per share dividend.

Noting that the group’s shares are down some 30% on the year, the analyst believes that the current share price levels represent an excellent buying opportunity.

My View – A Rise to 100p Looks Possible

The group’s vision is to be the leading specialist supplier of products to house builders and contractors.

It has advanced through both organic and acquired expansion.

Earnings have grown at an average 32% per year over the past five years.

On the basis of consensus opinion, the group’s earnings are forecast to grow 34.11% per year.

The shares are currently trading at around the low levels last seen in March 2021.

I believe that Brickability will thrive against current headwinds and, furthermore, I reckon that the group’s shares, now at only 71p and on 6.7 times current year earnings, will show strong capital appreciation over the short-term, while representing excellent value over the next year or so.

A rise to 100p looks very possible.

(Profile 16.04.20 @ 39p set a Target Price of 55p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)