We estimate that SigmaRoc Plc (LON:SRC) recently announced acquisition of pre-cast concrete products business Topcrete should be earnings and margin enhancing to the group this year, with further benefits in 2018. Assuming Topcrete continues to perform at past levels (conservative – SigmaRoc sees scope for better optimising certain commercial aspects of the business), we estimate it will lift group-level EBITDA by 7% compared with our pre-deal estimate for the current year, and by 37% for 2018. EBITDA margins could rise from 20% to 23%. After adjusting for positive working capital within the business, the acquisition price equates to just 6x incremental EBITDA – excellent value given SigmaRoc’s pre-deal market EV/EBITDA multiple of 10x, and illustrating the merits of its niche-asset buy-and-build growth strategy. Adjusting our EV estimate for debt taken on to fund the transaction, SigmaRoc is now trading at just 8.7x our revised 2018 EBITDA estimate for the enlarged group. This represents an attractive valuation relative to the peer-group median of 10.4x, notwithstanding the potential for more earnings growth as the group further rolls out its deal pipeline.
Earnings estimates updated for Topcrete consolidation: We have updated our financial forecasts to incorporate SigmaRoc’s acquisition last week of Topcrete, a well-established UK concrete products business that is a market leader in the supply of bespoke wet-cast products. The business recorded revenue of £5.2m, EBITDA of £2m and underlying PBT of £1.8m in the year to February 2017. Our forecasts assume it continues to perform at these levels going forward, a conservative approach given SigmaRoc sees scope to further optimise commercial activities under its ownership. Assuming two full months of contributions from Topcrete this year, our revenue and EBITDA estimates for SigmaRoc increase by 3% and 7% accordingly. Going forward from 2018, our revised revenue and EBITDA forecasts increase by 20% and 37% versus our prior estimates. Our estimate of 2017 year-end cash is largely unchanged (SigmaRoc used its pre-arranged term debt facility to fund the £9m upfront cash component of the acquisition), while our 2018 year-end cash estimate falls by 33% (as we assume the £3.5m deferred payment is settled in full using cash generated from operations).
Investment view: A well-established market leader in a specialist sector in which quality rather than volumes drive margins, Topcrete meets SigmaRoc’s criteria of targeting niche businesses that are in some way insulated from direct competition with majors. Moreover, the earnings and margin-accretive nature of the transaction demonstrates how this buy-and-build strategy can deliver real value creation. With an EV of just 8.7x our estimate of 2018 EBITDA, SigmaRoc looks inexpensive versus the peer group median of 10.4x, particularly given our expectation of more earnings growth as the acquisition pipeline is further rolled out
