Investments In Lionmark And Peak Cluster Will Improve Future Market Position

Key Takeaways

• U.S. market expansion and strategic acquisitions enhance Breedon's revenue prospects and stabilize earnings across varying economic conditions.
  
• Sustainability initiatives and strategic capital investments position Breedon to capitalize on environmental trends and improve long-term operational efficiencies.
  
• Contraction in U.K. construction and weather challenges impact volumes, while tax increases and strategic acquisitions may affect long-term profitability and cash flows.

Catalysts

Engages in the quarrying, manufacture, and sale of construction materials and building products primarily in the United Kingdom, Republic of Ireland, and internationally.

• Breedon's strategic expansion in the U.S. market through the acquisition of Lionmark enhances its potential for future revenue growth and increased market share, primarily in the Midwest, which is expected to benefit from infrastructure spending. This diversification is likely to increase revenues and stabilize earnings across different economic conditions.
  
• The integration of BMC into Breedon's operations has contributed to structurally higher margins, complementing the group's overall EBITDA margin improvement. Continued focus on operational efficiencies and cost management in the U.S. division is likely to positively impact net margins.
  
• Breedon's investment in sustainability initiatives, such as the solar farm in Ireland, and the Peak Cluster carbon capture and storage project, positions the company to benefit from long-term trends towards environmental responsibility, potentially enhancing revenue opportunities and cost efficiencies in operations.
  
• The company's strategic capital investments in new projects like the replacement of the primary crusher at Hope and expansion in airfield surfacing capacity are set to improve operational efficiencies and capacity, driving higher revenue potential and improving margins in the long term.
  
• Significant cash generation and effective credit management provide financial headroom for further strategic investments and potential acquisitions, supporting future earnings growth. The disciplined approach to leveraging provides flexibility for future expansion, aimed at enhancing EPS and shareholder returns.

Breedon Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Breedon Group's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 8.0% in 3 years time.
• Analysts expect earnings to reach £161.8 million (and earnings per share of £0.46) by about March 2028, up from £96.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the GB Basic Materials industry at 29.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Breedon Group Future Earnings Per Share Growth

Risks

• The U.K. market has seen a contraction in construction output, notably impacted by a decline in housebuilding, leading to a decrease in volumes for Breedon's GB business, which could impact revenues and net margins.
  
• Weather conditions have adversely affected operations both in the U.S. and GB, causing unstable volumes and potentially affecting near-term earnings and profitability.
  
• The Peak Cluster carbon capture project faces delays due to complex negotiations with multiple partners, indicating potential capital expenditure exposure that could affect future cash flows.
  
• The Lionmark acquisition, although strategic, has a mid-single-digit ROIC prior to synergies, suggesting initial dilution to returns and requires execution to meet Breedon's target return on invested capital (ROIC).
  
• Increased tax rates in the U.K. and the high marginal tax rate in the U.S. reduce cash conversion targets, which might restrict reinvestments and thus could impact long-term earnings potential.

Valuation

• The analysts have a consensus price target of £5.499 for Breedon Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.5, and the most bearish reporting a price target of just £4.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.0 billion, earnings will come to £161.8 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of £4.87, the analyst price target of £5.5 is 11.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.