Sigmaroc PLC (LON:SRC) is the topic of conversation when Zeus Capital’s Director of Mining and Metals Nick Chalmers caught up with DirectorsTalk for an exclusive interview
Q1: Sigmaroc announced an acquisition this morning, can you talk us through it?
A1: The company announced its buying a business called Topcrete, Topcrete is the sole owner of a subsidiary company called Allen Concrete which is a manufacturer and supplier of high quality and bespoke wetcast concrete products, its main production facility is in the Midlands but it also has a distribution unit in the Greater London area. The business is well-established, it was founded about 60 years ago and it services customers in the building industry that range from small builder’s merchants to major infrastructure groups such as Network Rail. Its product offerings include bespoke wetcast concrete products for fencing, for buildings both residential and commercial and for gardens.
Q2: Can you give us a flavour then of Topcrete’s financial performance?
A2: It’s a very high margin business relative to what we normally see in the construction materials sector elsewhere. In its financial year to February 2017, Allen Concretes had an EBITDA of £2 million and that was off revenue of £5.1 million, that’s a 38% margin which compares with Sigmaroc’s current EBITDA margin and our calculations of around 20%. So, we expect this deal to be earnings and margin-enhancing to the company immediately.
Q3: So, what is Sigmaroc actually paying for the business?
A3: There’s an upfront cash consideration of £9 million which Sigmaroc will fund from a term debt facility that they already have in place then there’s a deferred amount of up to £3.5 million which is payable over the next 12 months, subject to Topcrete’s current owners providing certain agreed transitional services over that period. Offset against that purchase price is around £500,000 of working capital within the business which will be released to Sigmaroc so we’re looking at a net maximum acquisition price of £12 million.
Q4: How does that look from a value perspective?
A4: Very good value, in our view. The full consideration amounts to just over 6 times that business’ steady state, Sigmaroc was trading at 10 times our estimate of its EBITDA prior to this deal and it bought its flagship asset Ronez for around 8 times EBITDA so this look value-accretive to us based on those metrics.
Q5: How does this fit in with the group’s wider strategy?
A5: Sigmaroc’s management has stated since its inception last year that it will be pursuing a buy and build strategy that’s focussed on niche assets that have particular characteristics that enable them to avoid head-on competition with cement majors. I think Topcrete is consistent with that, it’s a market leader in a specialist sub-sector that is quality and therefore it’s an area that the building materials majors will probably be unlikely or unable to seek entry too easily.
Q6: Do you anticipate any further acquisitions from Sigmaroc?
A6: I think so, management has stated an ambition to grow both organically and through acquisitions, this deal increases its cash flow generative base and therefore strengthening its hand for any further growth plans. It does state actually in this morning’s press release that it is in advanced negotiations and another potentially imminent transaction so I think there could be more positive catalysts come for the stock in the relatively near-term so let’s wait and see.
