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INTERVIEW: SigmaRoc Plc Acquisition very good value say Zeus Capital

SigmaRoc Plc (LON:SRC) is the topic of conversation when Zeus Capital Director of Mining and Metals talks to DirectorsTalk about its latest acquisition. Nick talks us through the acquisition of Topcrete Limited, shed some light on its financial performance, the price paid and how that looks from a value perspective, how this fits within the group’s wider strategy and Nicks thoughts on further acquisitions from the company.

Progressing its buy-and-build growth strategy, SigmaRoc has negotiated the acquisition of Topcrete Ltd, a supplier of high-quality pre-cast concrete products to the construction industry with operational facilities in the Midlands and London. The initial cash consideration is £9m (to be funded from SigmaRoc’s term loan facility), with a further £3.5m deferred and a conditional amount payable over the next 12 months Management believes the acquisition will prove earnings accretive immediately – in 2016 the business generated EBITDA of £2m from revenue of £5.2m, a margin of 38% (versus our pre-acquisition estimated 2017 EBITDA and margin for SigmaRoc of £5.1m and 20% respectively). At 6.25x EBITDA, the acquisition multiple compares favourably against the c8x SigmaRoc paid for its flagship Ronez asset and is also significantly lower than the 10.1x multiple the group was trading at pre-announcement. Assuming Topcrete continues to generate EBITDA of £2m going forward (management believes there may be scope for growth), SigmaRoc’s annualised EBITDA generation could be enhanced by 35-40% to >£7m, putting it on a forward-looking multiple of just 9x based on yesterday’s closing price. With the peer group trading at 11.5x, we believe there is ample room to re-rate.

Specialist concrete products supplier with strong brand: Topcrete is known for its wholly-owned trading subsidiary Allen Concrete, a specialist pre-cast concrete products business that was founded over 60 years ago and which enjoys a market-leading position within its sector. The business is well regarded for its high-quality wetcast and bespoke products, and supplies a wide range of customers ranging from builders’ merchants to major infrastructure operators (notably including Network Rail). Its assets include a freehold production facility in the Midlands and a further freehold industrial site in London. In its financial year ended February 2017, Allen Concrete recorded revenue of £5.2m, generating EBITDA of £2m and underlying PBT of £1.8m.

Terms: The business is being acquired from Mr Roy Topp and Mr Peter Farenden (c64% and c14% shareholders respectively) and several other minority shareholders. The upfront £9m cash consideration will be funded through SigmaRoc’s existing term facility with Santander. The £3.5m deferred consideration will be settled over the 12 months following completion, conditional on Messrs Topp and Farenden remaining with the group and providing certain agreed transitional services. Management calculates that the transaction will also release £0.5m in working capital for SigmaRoc.

Investment view: The acquisition is consistent with SigmaRoc’s stated strategy of targeting business with unique characteristics to avoid competition with majors – Allen Concrete operates in a specialist sector with a strong brand built over several decades, and is quality rather than volume driven. This enables it to generate wide margins that should prove accretive to SigmaRoc immediately. We will update our forecasts to incorporate the acquisition in due course. However, simply adding the £2m EBITDA generation to our estimated £5.1m current annualised EBITDA potential of SigmaRoc (and adjusting debt for the acquisition price) would put SigmaRoc Plc on an EV/EBITDA multiple of just 9x – a compelling valuation versus the peer group average of 11.5x.

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