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Hope and change in halfway numbers

The Times

The rise of Breedon to become the biggest independent construction materials group in the UK is a gratifying one. The other big operators are foreign-owned or controlled. Breedon, which takes its name from the Leicestershire village containing a historic quarry, was created by Peter Tom, an industry veteran and executive chairman, seven years ago to acquire some assets from Barclays Bank.

It has grown by a number of regional acquisitions — the market is fragmented because it is expensive to transport materials across any distance. Breedon’s big break came with the £336 million purchase of Hope Construction Materials, which completed last August.

It is therefore in the halfway numbers for the first time and the transformational effect is obvious. Revenues doubled to £326.3 million and pre-tax profits were ahead by 50 per cent to £31.2 million. Hope brought with it a cement plant in Derbyshire which was out of operation for maintenance for some of the first half.

Breedon had bought a company operating two terminals on the east coast that allowed it to ship in cheap cement from the Continent to supply its ready mixed concrete operations. It is still looking at bolt-on deals, one being carried out in May, and has further room to grow in the southeast and southwest.

Encouragingly, margins at its original operations rose from 14 per cent to 15.8 per cent in the half, about right historically for the industry and ahead of the 15 per cent target the company had set for 2020. Hope’s are below 10 per cent, largely because of its ready mixed operations which tend to earn a lower margin. Breedon is confident, though, of reaching that 15 per cent target across the group, in part from the £10 million of synergies identified.

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About 70 per cent of its work comes from housebuilding and infrastructure investment, so the continuing housing boom and any planned spending in the public sector will bring benefits. There is no dividend and little prospect of one. With a market capitalisation of £1.3 billion, graduation from AIM to the main list will happen one day. The shares, up ¾p at 88¼p, sell on a relatively high 24 times earnings but remain a solid prospect.

MY ADVICE Buy
WHY The shares are not cheap but the benefits of scale from the Hope deal and other continuing acquisitions will come through next year

Nichols
Nichols, the soft drinks group that owns the Vimto brand, is sitting on almost £30 million of cash, which might seem excessive. However there is a five-year expansion plan under way at the company, which is still 32 per cent owned by the Nichols family. The drinks brands Feel Good, which makes healthy juices, and Noisy Drinks, a maker of frozen products, have been bought over the past couple of years.

Nichols announced another purchase yesterday with its halfway figures. DJ Drinks Solutions, its distributor in the northwest and northeast, has been bought for an estimated £6 million as part of a strategy to take in-house distributors to hotels, pubs, restaurants and bars.

There was little else unexpected in the numbers. The company had primed the market for some erosion of margins from higher input prices because aluminium, plastic, juices and sugars are sourced in dollars and euros and so are more expensive.

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Operating margins duly slipped by a point to 20 per cent. Nichols, though, is still growing market share, UK sales were up 6.7 per cent against 2.9 per cent for the soft drinks market as a whole, and pre-tax profits were up by almost 7 per cent. There was a strong performance from its international operation, including a 31 per cent rise in Africa where Vimto is increasingly popular.

The shares have risen strongly from just above £11 at the start of last year and fell 57½p to £18.15 on the halfway figures. They sell on a hefty 26 times earnings and some might consider taking profits.

MY ADVICE Take profits
WHY Rise in share price provides good return

Howden Joinery
If consumers are hesitating before buying big ticket products such as kitchens because of the political uncertainty, this does not seem to be reflected in the experience of Howden Joinery, which supplies small builders through its 650-odd depots. The company has been investing heavily in a new distribution centre and 22 new kitchen ranges, which held back first half profits to £65.6 million, a fall of 12 per cent.

Yet sales from its UK depots were up by 4 per cent in the half-year to June 10 and by 6.5 per cent in the month since then, which covers the period after the election.

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The company was hit by the higher cost of importing because of the weaker pound but margins held firm at 64 per cent. It gets about 70 per cent of profits in the second half as people put in new kitchens before Christmas, so that post-election rise is encouraging.

The company is carrying a lot of cash, £215 million at the end of the first half, but much of this is needed while of an £80 million share buyback programme only £11 million has been spent so far. The shares, up 3½p at 432¾p, sell on 15 times this year’s earnings and look fully valued.

MY ADVICE Avoid
WHY The price would seem to take account of prospects

And finally . . .
Several analysts keep a close eye on United Rentals in the US as an indicator of how its rival Ashtead, the plant hire group with the majority of its business in North America, is faring. The latest figures from United are promising enough, says Jefferies in a note, the company having raised its guidance for 2017 on the back of better plant utilisation and rising rentals. Ashtead has of course beefed up its Sunbelt Rentals business in North America this week with the £165 million purchase of CRS, a Canadian provider of plant for rent.

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