Brickability Group’s latest results showed strong growth at the AIM listed building materials distributor, which, in a difficult general economic environment, must have given management a sense of being justified in its optimistic acquisition strategy.
Shares saw a strong rally in 2021 and while the price has seen a dip so far, the model (supply rather than make building materials) is working and the diversification strategy is also paying off.
With only a handful of competitors vying for space in the brick distribution scene, brickability has seized the opportunity to expand both organically and acquisitively.
Building Up: With only a handful of competitors vying for space in the brick distribution scene, Brickability has seized the opportunity to expand, both organically and acquiringly
While three major brick manufacturers – Ibstock, Forterra and Austrian leader Wienerberger – also have a share of the distribution, their combined market share is only about 40 percent.
Pure play distributor EH Smith has a sizeable operation, but is largely focused on the South East and the Midlands.
Other great merchants such as Jodenson and Travis Perkins (LSE:TPK) are strong in retail, but lack the specialist offerings expected by large-scale builders.
In what was the most significant acquisition for the company to date, Taylor Maxwell, once a real competitor, was bought by Brickability in June 2021 for £63 million.
Chairman John Richards saw an opportunity to tap into the social housing market through the trader, which, in his own words, has ‘performed well beyond expectations’.
Cash flows also saw a rise from the acquisition: Brickability moved from a negative £7m position to a black position, albeit a modest £400,000, although Richards expects the needle to tip back into negative territory next year.
The recent prelims reveal a company in rough financial health with sales up 187 per cent to £520.2 million for the 12 months ended March 31. Extracting the impact of recent acquisitions, like-for-like revenue growth was still an impressive 31.9 cents per year.
Generalists: Other major merchants such as Jodenson and Travis Perkins (pictured) are strong in retail, but lack the specialist offerings expected by large-scale builders
Underlying earnings (EBITDA), meanwhile, have more than doubled to £39.5 million. Investors were rewarded with a 54 percent dividend increase, which at 3 pence equates to a return of 3.8 percent.
While Taylor Maxwell’s purchase was easily the highest profile, other recent bolt-ons have included roofers Leadcraft and Beacon Roofing (based in Hampshire and Surrey, respectively) and solar panel installer HBS New Energies, who have broadened the mix away from bricks.
After the end of the year, Brickability bought Modular Clay Products in May for £5.5 million, further adding to its brick distribution capacity.
The HBS acquisition is notable for being Brickability’s first foray into renewable energy and sustainable products.
This growth strategy has led the group to ‘enter new market segments, increase our import and distribution capacity, expand our customer and customer base and build on our existing product portfolio,’ said Richards.
He noted that Brickability’s European product pipeline has received a particularly healthy boost, doubly important given an ongoing shortage of bricks in the UK.
Historically, the real power in distribution has been with home builders, but recent corporate takeovers have expanded customers’ books on architecture, contractors, and other specifications.
Buy and build has been a strategy since the company’s IPO in August 2019 and while harsh restrictions on price, multiples and deferred considerations are in place, management remains aloof in some respects.
“We tend not to change the name above the door. If the company is worth buying, it tells me the brand and management can’t be bad,” explains Richards.
Now the challenge is to manage these bout-ons and not get buried by runaway expansion.
For Richards, this means putting further “transformative” acquisitions on the back burner rather than organic growth, with an emphasis on improving the company’s leading strategies for diversification, expanding geographic reach and strengthening its global footprint. European import options.
“There’s one or two bolts in the pipeline,” Richards added.
British brick distribution powerhouse or not, Brickability is not immune to the macro pressures impacting supply lines and overall housing demand.
But bricks are not as expensive to import as one might now think.
Belgium and the Netherlands, the two major European brick factories, are relatively close neighbors to the UK and their factories are generally “very large, very modern and very mechanical, with low production costs and high efficiency,” Richards said.
And what about the housing market, where Brickability derives just under half of its revenue?
While the risks should not be underestimated, “all housing fundamentals are still very much in place, driven by political support from all parties,” Richards said, while mortgage rates also remain relatively low (for now).
But Brickability’s diversification series added a risk factor.
Expanding into the timber sector following the Taylor Maxwell acquisition, Brickability is now exposed to commodity-driven timber prices, which hit record levels in the summer of 2021 and have only slightly retracted since then.
In addition, the fiercer competition in the roofing sector is putting downward pressure on supply prices for that segment of the company.
That aside, Kevin Cammack of broker Cenkos believes Brickability has “did remarkably well both growing the business organically and executing and integrating the acquisitions.”
He notes that the stock price has come under pressure in the past nine months, in line with the broader industry, and believes they are “quite as cheap as you could ever have bought them today, and yet the company has made huge strides.” in terms of returns’.
Brickability’s appetite for transformational acquisitions may have quenched temporarily, but Cammack says “it certainly isn’t the end of the story” for the company’s growth trajectory.
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