SMALL CAP IDEA – DIY laying the groundwork for future expansion

Brickability Group’s latest results showed strong growth at the AIM-listed building materials retailer, which, in a tough general economic environment, had to give management a sense of justification for its bullish acquisition strategy.

Its shares have seen strong growth throughout 2021 and although the price has fallen since the start of the year, the model (delivering rather than manufacturing building materials) is working and the diversification strategy is also paying off.

With only a handful of competitors jostling for space in the brick distribution scene, Brickability seized the opportunity to grow, both organically and through acquisition.

Build: With only a handful of competitors jostling for space in the brick distribution scene, Brickability seized the opportunity to grow, both organically and through acquisition

While three major brick manufacturers – Ibstock, Forterra and Austrian leader Wienerberger – are also involved in distribution, their combined market share is only around 40%.

Pure-play distributor EH Smith has a large operation, but is largely concentrated in the South East and Midlands.

Other big merchants such as Jewson and Travis Perkins (LSE:TPK) are strong in retail, but lack the specialist offering expected by large-scale builders.

In what was the biggest acquisition for the company to date, Taylor Maxwell, once a serious competitor, was acquired by Brickability in June 2021 for £63million.

Chairman John Richards saw an opportunity to tap into the social housing market through the trader, which he said had “far exceeded expectations”.

Cash flow also saw an increase in the acquisition: Brickability moved from a negative position of £7m to a position in the black, albeit at a modest £400,000, although Richards s expect the needle to return to negative territory the following year.

Recent preliminaries reveal a business in poor financial health with revenue up 187% to £520.2million for the 12 months to March 31. Extracting the impact of recent acquisitions, like-for-like revenue growth was still an impressive 31.9 percent. hundred.

Generalists: Other large merchants such as Jewson and Travis Perkins (pictured) are strong in retail, but lack the specialist offering expected by large-scale builders.

Generalists: Other large merchants such as Jewson and Travis Perkins (pictured) are strong in retail, but lack the specialist offering expected by large-scale builders.

Underlying profit (EBITDA), meanwhile, more than doubled to £39.5 million. Investors were rewarded with a 54% hike in the dividend, which at 3 pence per share equates to a yield of 3.8%.

While the Taylor Maxwell purchase was by far the most high-profile, other recent additions have included roofing contractors Leadcraft and Beacon Roofing (based in Hampshire and Surrey respectively) and solar panel installer HBS New Energies , which expanded the mixture away from the bricks.

After the end of the year, Brickability purchased Modular Clay Products in May for £5.5 million, further increasing its brick distribution capacity.

The acquisition of HBS is notable in that it represents Brickability’s first foray into renewable energy and sustainability products.

This accretive strategy has seen the group “open up to new market segments, increase its import and distribution capacity, expand its customer base and customer base, and build on its existing product portfolio”, said Richards.

He noted that Brickability’s European product portfolio has enjoyed particularly healthy momentum, doubly important given an ongoing shortage of bricks in the UK.

Historically, its real strength in distribution has been with home builders, but recent corporate acquisitions have increased the company’s client portfolio in architecture, contracting and other specifications.

Buy and build has been a strategy since the company’s IPO in August 2019 and while strict restrictions on pricing, multiples and deferred considerations are in place, the direction remains in some respects.

“We tend not to change the name above the door. If the company is worth buying, that tells me the brand and management can’t be wrong,” Richards explained.

Now the challenge is to manage those bolts and not get buried by runaway expansion.

For Richards, that means putting any new “transformative” acquisitions on the back burner instead of organic growth, focusing on improving the company’s guiding diversification strategies, improving geographic reach and building business capabilities. European imports.

“A bolt or two is in the works,” Richards added.

UK brick distribution powerhouse or not, Brickability is not immune to macroeconomic pressures affecting supply lines and general demand in the housing market.

But bricks are not as expensive to import as you might think right now.

Belgium and the Netherlands, Europe’s two great brick-making powers, are relatively close neighbors to the UK and their factories tend to be “very large, very modern and very mechanical, with low production costs. production and a lot of efficiency,” Richards said.

And what about the housing market, from which Brickability derives just under half of its revenue?

While the risks shouldn’t be underestimated, “all of the housing fundamentals are still in place, thanks to all-party political support,” Richards said, while mortgage rates also remain relatively low (for the instant).

But Brickability’s diversification streak added an element of risk.

Having expanded into the wood sector following the acquisition of Taylor Maxwell, Brickability is now exposed to commodity-driven wood prices, which reached record highs in the summer of 2021, having retreated only slightly since. .

In addition, tougher competition in the roofing sector is exerting downward pressure on supply prices for this segment of the business.

That aside, Kevin Cammack of brokerage Cenkos believes Brickability “has been remarkably successful in both growing the business organically and executing and integrating acquisitions.”

Noting that the stock price has come under pressure over the past nine months, in line with the wider industry, he believes they are “about as cheap today as you could have bought them, and yet the company has made huge strides in terms of Return’.

Brickability’s appetite for transformational acquisitions may have cooled temporarily, but, according to Cammack, “that’s certainly not the end of the story” for the company’s growth trajectory.

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