SMALL CAP IDEA: Brickability laying the foundations of future expansion

Brickability Group’s latest results showed strong growth at the AIM-listed building supplies distributor, which, in a tough general economic environment, must have left management feeling vindicated for its bullish acquisitive strategy.

Its shares enjoyed a strong run throughout 2021 and while year-to-date the price has seen a dip, the model (delivering rather than making building materials) is working and the diversification strategy is paying off too.

With only a handful of competitors jostling for space in the brick-distribution scene, Brickability has seized on the opportunity to expand, both organically and acquisitively.

While three major brick manufacturers — Ibstock, Forterra and Austrian leader Wienerberger — also have a hand in distribution, their combined market share is only around 40 per cent.

Pure-play distributor EH Smith has a sizable operation, but is largely focused in the southeast and Midlands.

Other large 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 most important acquisition for the company to date, Taylor Maxwell, once a genuine competitor, was bought out by Brickability in June 2021 for £63million.

Chairman John Richards saw an opportunity to tap into the social housing market through the merchant, which he said has ‘very much performed above expectations.’

Cash flows saw an uplift from the acquisition too: Brickability went from a £7million negative position to being in the black, albeit at a modest £400,000, though Richards does expect the needle to flip back into negative territory again the following year.

The recent prelims reveal a company in rude financial health with revenues up 187 per cent at £520.2million for the 12 months ended March 31. Extracting the impact of recent acquisitions, like-for-like top-line growth was still an impressive 31.9 per cent.

Underlying earnings (EBITDA), meanwhile, more than doubled to £39.5million. Investors were rewarded with a 54 per cent hike to the dividend, which at 3p a share equates to a 3.8 per cent yield.

While the Taylor Maxwell purchase was easily the highest profile, other recent bolt-ons have included roofing contractors Leadcraft and Beacon Roofing (based in Hampshire and Surrey respectively) and solar panel installer HBS New Energies, which have broadened the mix away from bricks.

Post the year-end, Brickability purchased Modular Clay Products in May for £5.5million, further adding to its brick-distribution capacity.

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

This accretive strategy has seen the group ‘move into new segments within the market, increase our import and distribution capacity, expand our customer and client base and build upon our existing product portfolio’, said Richards.

He noted that Brickability’s European product pipeline has enjoyed a particularly healthy boost, doubly important given an ongoing brick shortfall in the UK.

Historically, its real strength in distribution has been with house builders, but recent business acquisitions have increased the company’s book of architecture, contracting and other specification clients.

Buy and build has been a strategy ever since the company’s IPO in August 2019 and while hard-line restrictions on price, multiples and deferred considerations are in place, management stays hands off in some respects.

‘We tend not to change the name over the door. If the business is worth buying, it says to me that the brand and the management can’t be bad,’ explained Richards.

Now the challenge is to manage these bolt-ons and not get buried by runaway expansion.

For Richards, that means putting any further ‘transformative’ acquisitions on the backburner in place of organic growth, focusing on improving the company’s guiding strategies of diversification, improving geographical reach and bolstering European import capabilities.

‘One or two bolt-ons are in the pipeline,’ added Richards.

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

But bricks are not as expensive to import as one might think at the moment.

Belgium and The Netherlands, the two big European brickmaking powerhouses, are relatively close neighbours to the UK and their factories tend to be ‘very big, very modern and very mechanical, with low costs of production and a lot of efficiency,’ said Richards.

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

While the risks shouldn’t be understated, ‘all the fundamentals for housing are still very much in place, driven by cross-party political support’, said Richards, while mortgage rates also remain relatively low (for now).

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

Having expanded into the timber sector following the Taylor Maxwell acquisition, Brickability now faces exposure to commodity-driven timber prices, which went to record levels in the summer of 2021, having only slightly retracted since.

Furthermore, tougher competition in the roofing sector places downward pressure on supply prices for that segment of the business.

That aside, Kevin Cammack, from broker Cenkos, believes that Brickability ‘has done remarkably well to both grow the business organically and to execute and integrate the acquisitions’.

Noting that share price has come under pressure in the last nine months, in line with the broader sector, he believes they are ‘pretty much as cheap today as you could have ever bought them, and yet the business has made enormous strides in terms of returns’.

Brickability’s appetite for transformational acquisitions may have cooled off temporarily, but, according to Cammack, ‘it certainly isn’t the end of the story’ for the company’s growth trajectory.