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Zeus Capital

SigmaRoc plc Building differentiated growth – Zeus Capital

With its £45m acquisition of Ronez Ltd, a vertically-integrated aggregates producer in the Channel Islands, SigmaRoc plc (LON:SRC) has emerged as a new, growth-orientated construction materials company. But utilising management’s experience with industry majors, its growth model is differentiated from the regionally-focused ‘buy-and-build’ strategy typically employed in the sector – rather than target market share in a particular geography, the company is looking to build a portfolio of niche assets that avoid head-on competition with majors and which provide income diversification to maintain robust margins throughout the industry cycle. As the dominant operator in island markets where barriers to entry are high, Ronez fits this model well, and as a high-quality, cash-generative business with a long track record of profitability it also provides SigmaRoc with a solid platform from which to leverage its growth strategy – we expect the group to execute further earnings-accretive transactions and/or organic investments over the coming months which should see the shares re-rate higher as management pursues its ambition of building a £500m market capitalisation business in five years.

High-quality cornerstone acquisition: Ronez provides SigmaRoc with immediate scale and earnings diversification from which to leverage further growth and, potentially, to underpin future dividends. As the dominant operator in developed island market economies which are committed to self-sourcing aggregates it has a track-record of financial stability, generating £4.4-5.0m pa EBITDA through 2013-15 (17-19% margin). We believe there is potential for >£6m pa EBITDA at the Ronez-level as efficiencies are unlocked under the new independent ownership structure, implying an acquisition multiple of <8x.

Growth pipeline: The deal establishes a relationship with a blue-chip industry major in vendor LafargeHolcim, a relationship which may bear further fruit given the latter’s ongoing divestment programme. Moreover, management’s prior experience of working within such industry majors may yield future, rapid-payback project-level partnerships with such groups, and it already has a sizeable portfolio of further acquisition and/or investment opportunities worked up which we anticipate being rolled out over the coming months.

Valuation: SigmaRoc plc is trading at an EV/EBITDA 2017 of 10.9x, a discount to the current sector average of 12.5x. Attaining the latter would see uplift to 53p, but as a fast-growing company starting from a much smaller base, we believe SigmaRoc warrants an above-average rating as it embarks on its growth strategy – 14x current forecast EBITDA (i.e. Ronez-only income) would see a target of 60p (33% upside), and longer-term we see further valuation upside potential to this as management continues to roll out its growth plans.

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