Brickability, Sureserve

Peter highlights three stocks that he believes are underappreciated by the wider market. Please note that these are not covered by Killik & Co research.

In the Special Situations team, we are very much bottom-up stock pickers who assess firms on their own merits. As such, we do not solely focus on either a pure growth strategy or a solely value-based one. That’s because, whilst a pure value mindset has generated good results over the long-term, it has nonetheless also suffered significant periods of underperformance. The most obvious were during the technology boom of the late 1990’s and more recently during the decade running up to and encompassing the pandemic. Nonetheless, this quarter I want to highlight three stocks names which could benefit from some big, and hopefully near-term, catalysts which will unlock hidden value.

Brickability – building profits

Brickability is a specialist distributor of building products used by housebuilders and contractors in the UK. However, its origin lies in bricks, where it acts as a “brick factor” – in effect, as an agent with deep product knowledge. Bricks are esoteric when it comes to their manufacture and supply due to the high capital costs of creating brickworks, coupled with the need to run such facilities continuously. In the wake of the 2008 recession, significant reductions in the field sales forces of UK brick makers, combined with large cutbacks within the purchasing departments of housebuilders, created Brickability’s opportunity. The firm can optimise pricing on behalf of the former, whilst ensuring that the technical specifications of the bricks required on each site are met with deliveries that match production schedules. However, bricks are not the whole picture. The firm has also leveraged its relationships with housebuilders to offer them a one-stop shop for a broad range of building products. Indeed, the primary reason for the group listing on AIM in 2019 was to drive this model forward via acquisition. So far, it has completed ten in the last three years, despite the obvious challenges thrown up by a pandemic. We recently invested in Brickability as part of its capital raising exercise to part-fund the sizeable acquisition of Taylor Maxwell, another supplier to the housebuilding sector. The company raised a total of £55m in new equity to fund the £63m enterprise value (EV) takeover, which equates to a maximum historic EV to earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 5.4. Taylor Maxwell operates a similar business model, albeit it has a greater focus on timber-based products that are sold using a lower margin “pass through” structure. Crucially, the two firms have less than a 10% customer overlap, meaning there is significant cross-selling potential, given that Taylor Maxwell has strong relationships with several second-tier house builders. Further, with its higher overhead burden, synergy benefits should materialise that are not fully reflected in market forecasts, before functional duplication is factored in. Even without these, the deal is expected to boost earnings by at least 25% during the financial year 2022 (FY22). At the issue price of 95p, the shares trade on 13.4 times March 2022 earnings (based on a nine- month contribution from Taylor Maxwell), falling to 10.8 times for 2023, the first full year of ownership. Meanwhile, the prospective yield is 2%. As for peers, we would include 11 firms within the UK building materials space; Breedon, Genuit, Grafton, Howdens Joinery, Kingspan, Marshalls, Norcros, SigmaRoc, Travis Perkins, Volution and Wickes. This group has a surprisingly tight valuation range, with a current year average price to earnings ratio of 21.3 (median 22.3), and an average of 18.7 (median 18.3) for FY22. We believe that this acquisition will act as a catalyst to close the valuation gap as the business proves its “buy and build” model and its increasing size makes it more attractive to institutional investors.

Uncovering value

Peter Bate

Portfolio Manager

Sureserve – energising growth

Sureserve is a leading regulatory compliance and energy services group that performs critical functions for homes as well as public and commercial buildings. With a focus on clients in the UK public sector and regulated markets, its services are delivered through two divisions. During FY20 compliance activity generated 69% of revenue and 94% of profits and energy services the rest. However, given that the latter’s activities were restricted by the pandemic, we would expect its profit contribution to be more like 35% by FY22. The key business line at the Compliance Division is the annual inspection and testing of gas appliances in the social housing, public buildings and educational property sectors across the UK. As the largest provider of public sector gas testing in