The Small Cap Veteran – 9 Feb 2021

It always pays to take heed of the words from industry leaders and company bosses, after all they really know what is actually going on in their sectors.

So, I perked up when I read a recent statement from Marco Verdonkschot, boss of Ironmongery Direct, the UK’s largest supplier of specialist ironmongery, that despite the hassles of last year the UK construction industry is well and truly on the path to recovery.

New housing made up 25% of all construction output, and was the largest sector for new work, which amounted to 62.8% of all output in total. The remaining 37.2% consisted of all types of repair and maintenance.

He stated that it is clear from the past year that construction in the UK is an incredibly resilient sector and has the strength to bounce back from any setbacks.

Support for all of those involved in the housing market, from renters and buyers to builders, and measures to help the construction industry to work safely during the pandemic, led to an increase in the number of completed homes.

The official statistics show 35,710 homes were started in July to September 2020 – a 111% increase when compared to the previous quarter – while, 45,000 homes were completed in the same period, representing a 185% increase on the previous quarter.

The recently announced figures reflect the housing and construction industry’s resilience and measures they have taken to keep building sites open, in line with public health advice.

Housing Secretary Robert Jenrick MP said that the figures show that the number of new homes developers have started building have more than doubled, when compared to the previous quarter while the number of completed homes has almost tripled. 

The Government extended planning permission deadlines and flexible working hours on sites so that builders, architects and developers have been able to continue working, while following public health advice. 

In turn that has protected millions of jobs, from builders, through to estate agents and carpenters.

Jenrick said that “The housing industry is key to our economic recovery, which is why we’re investing £12bn in affordable housing, providing £400m to build more homes on ‘brownfield’ land, and investing £7.1bn for a new National Home Building Fund over the next 4 years, unlocking up to 860,000 homes.”

Now the way that I see it is that this particular sector is really on the recovery tack and it will receive official support to help it prosper going forward.

So not only will the construction companies and the housebuilders see better times ahead but also, I suggest, so will the companies supplying products and services for the benefit of the sector players.

Obviously, there are literally hundreds of companies on the supply side, but I am only interested in the smaller quoted brethren.

My Research-Tree ‘Pick of the bunch’

This week I have selected eight companies that I follow very closely, all are involved in manufacturing and product supply to construction companies, builders and even those involved in renovation, maintenance and improvement. 

Alumasc (ALU) – mkt cap £55.6m, price 154p

This company is a supplier of premium sustainable building products, systems and solutions.

Some 80% of group sales are driven by building regulations and specifications (architects and structural engineers) because of the performance characteristics offered.

It has three business segments: Water Management; Building Envelope; and Housebuilding Products, each with strong positions and brands in their individual markets.

On Thursday of last week this group declared its interim results to end December 2020. They showed an exceptionally good performance during the Covid-19 lockdowns, in increasing sales by 11% to £45.6m, operating margins up 7.5% to 13.6%, and underlying pre-tax profits of £6.0m (£2.3m). Interim underlying earnings were 13.4p per share against 5.1p previously. Impressively net bank debt responded to a strong focus on working capital management.

Analyst David Buxton at finnCap was obviously pleased with the results stating that “H2 has started with strong momentum and forward orders. We increase our price target from 178p to 190p, with the shares the lowest rated in the sector and offering a very attractive yield of 5.6%.”

Brickability (BRCK) – mkt cap £154.9m, price 67p

Over the last 25 years Brickability has been serving customers across the building sector through its mainstream and local networks. It is a leading construction materials distributor. 

Across its three divisions, the group supplies bricks, roofing, heating, flooring, doors and windows to meet the demand of UK housebuilders.

Employing approximately 285 people, the group has 25 sites and sales offices throughout the UK.

The company, which supplies over 300m bricks annually, is beginning to show its potential for expansion and growth.

Its early December £1.75m acquisition of a transport and logistics operator, fits in with the group’s with its own pan-European transport network, ensuring security and control of supply lines and reducing exposure to third party freight providers at a critical moment for UK imports and exports.

Kevin Commack at Cenkos Securities rates the shares as a Buy, considering that on revised forecasts he models a ‘fair value’ of 70p.

In its Top Picks for 2021 Zeus Capital’s Andy Hanson notes that the company’s current valuation is not reflective of the quality of the business. He concludes that in the very short term the company looks as though it might offer considerable upside as its shares re-rate on earnings that will grow significantly.

Epwin (EPWN) – mkt cap £129.5m, price 87p

This group is a leading manufacturer of low maintenance building products with significant market shares, supplying the repair, maintenance and improvement, new build and social housing sectors.

Just two weeks ago the group announced a £3.8m plastic products acquisition, together with its end December finals Trading Update. It reported that trading had remained strong through to the end of the year, particularly from the RMI sector, with new build and social housing orders also picking up. 

Furthermore, trading since the start of 2021 had recommenced briskly with no significant Brexit or third lockdown related impact to date. 

There will be a further update on current trading at the full year results announcement in April.

On 9 times normalised earnings, analyst Alan Hanson at Zeus Capital, considers that the shares offer good value, and could be re-rated if the economy improves.

Forterra (FORT) – mkt cap £607.1m, price 264.5p

This company is the UK’s second largest brick producer, selling principally to the UK new build housing and residential repair, maintenance and improvement markets. 

It also manufactures concrete blocks and specialist clay and concrete products.

Believing housing market indicators will remain robust, analyst Alastair Stewart at Progressive Research confirmed his view on the company, following the Trading Update issued at the end of last month.

He stated that stronger than expected trading in November and December has prompted the group to raise its FY 2020E guidance for a second time, with particularly strong cashflow resulting in a year-end net cash position rather than its expectation of net debt. 

Norcros (NXR) – mkt cap £166.2m, price 209p

With operations in both the UK and in South Africa, this group is a leading supplier of showers, enclosures and trays, tiles, taps and related fittings and accessories for bathrooms, kitchens, washrooms and other commercial environments.

Analyst Toby Thorrington at Edison Investment Research considers that the group has driven its way through the challenges of last year. Despite a dent in its earnings, he believes that the business, arguably, is a lot stronger now.

He sees it being well placed to strengthen its market positions both organically and through acquisitions.

We shall see what happens when the group announces in early April, its finals Update to end March this year.

Safestyle (SFE) – mkt cap £58.1m, price 42.5p

This leading retailer and manufacturer of PVCu replacement windows and doors to the UK homeowner market published a Trading Update in the middle of last December.

It showed a none too positive picture of its trading in the first nine months, however it was encouraged to look forward to better business and the winning of new orders in Q4.

Considering that the outlook for 2021 was brightening, analyst Charlie Campbell at Liberum Capital rated the group’s shares as cheap.

While Andy Hanson at Zeus Capital noted that a recovery in demand will pick up pace, thereby increasing FY21 estimates.

SigmaRoc (SRC) – mkt cap £190.9m, price 68.5p

This ‘buy and build’ construction materials group will be reporting its 2020 finals on 13 April. Estimates are for revenues to have risen 77% to £124m, with an EBITDA improvement of 64% to £23.8m.

In its Q4 trading the group enjoyed encouraging market conditions across all of its businesses, especially getting a strong demand for its RMI and infrastructure products. And that has continued into the early part of this year too.

Analyst Charlie Campbell at Liberum Capital upgraded his estimates for the group following its Trading Update last week.

He sees a good upside in the shares as the recent fund-raising proceeds are redeployed. The group’s re-rating has further to go.

Topps Tiles (TPT) – mkt cap £125.3m, price 64p

This group is the UK's largest specialist supplier of tiles and associated products. It targets the UK domestic refurbishment and commercial market. It serves a retail and trade customer base from 343 nationwide retail stores, four commercial showrooms and three trading websites.

The company announced its Q1 Trading Update in early January showing that sales were up 19.9%, with good growth coming from both professional fitters and homeowners.

The group, on 31 March, will announce a trading update for the 26 weeks ending 27 March 2021. 

Adam Tomlinson at Liberum Capital upgraded his estimates upon the recent announcement. He noted that the group’s management has a confident five-year plan to return the company towards historic peak profit levels. 

With strong momentum, net cash, liquidity headroom of some £60m and a recovered 7 times pe he sees the shares going a lot higher.

About the author

He has been around the track a few times, now this former stockbroker and AIM company boss, gives us his views and pointers on his specialist subject – The UK Smaller Company Sector.

His comments are his own, he is not giving readers advice on whether you should Buy, Sell or Hold any of the companies that he might mention in his market ramblings.

He does not know what you might be looking for in your market dealings, so it is imperative that you must make up your own mind on his column’s content.

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