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SigmaRoc is cranking up the deal flow and its shares are cheap
Thursday 26 Oct 2017 Author: Daniel Coatsworth

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An under the radar building materials company is worth nearly 2.5 times its current market value, according to analysts. Now is the perfect time to invest in SigmaRoc (SRC:AIM) as its third acquisition proves it can find good targets at decent prices.

The company joined the stock market at the start of 2017 with the intention of buying niche businesses serving the UK and European construction industries.

Many large industry players are selling businesses as they focus on larger assets; or they are forced to sell in order to satisfy competition authorities following their own acquisition sprees. That creates opportunities for SigmaRoc.

Geographical diversity 

SigmaRoc is predominantly looking in the UK, France, Germany and Benelux. Its first deal was the £45m acquisition of Ronez, a hard rock quarry operator and construction materials producer based in Guernsey and Jersey. The islands are counter-cyclical to each other, so one tends to be strong and the other weaker in terms of construction activity, says the company.

We note that SigmaRoc fought off competition from £1.2bn construction group Breedon (BREE:AIM) to buy Ronez, according to investment bank Berenberg. The latter has a 12-month price target for SigmaRoc of 105p, more than 140% higher than the 43.25p trading price at the time of writing.

Berenberg believes SigmaRoc could eventually become a £1bn business. That assumes it raises £180m in equity and £290m in debt and buys assets at between seven and nine times EBITDA (earnings before interest, tax, depreciation and amortisation). It also believes SigmaRoc can extract circa 20% in synergies from its acquisitions.

There is already proof it can extract value from its acquisitions. Half year results in September saw the underlying business increase profit by more than 50% year-on-year. That period included a few months’ contribution from its shipping division set up in April off the back of buying a dry bulk carrier ship.

Hidden value in latest deal

Last week saw the £9m acquisition (plus £3.5m deferred consideration) of London and Midlands-based Allen Concrete, equating to 6.25 times EBITDA assuming the full price is paid.

The acquisition is interesting for two reasons. First, it generates 38% EBITDA margins which is high for the construction industry. It makes products with high quality finish such as posts, paving and grass blocks.

Second, the deal includes freehold industrial land in Croydon, South London valued independently at £4.5m. SigmaRoc’s chief executive Max Vermorken says half the land is used as a stock yard. ‘We could use the other half for something else, or relocate the stock yard and sell the land,’ he adds.

Berenberg forecasts £2.6m pre-tax profit this year for SigmaRoc, rising to £5m in 2018. (DC)

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