25th Nov 2022 11:33
(Alliance News) - Breedon Group PLC on Friday said it has managed to "fully recover" accelerating input costs so far in the second half of the year thanks to price hikes, but analysts cautioned that rising input cost inflation will be "key" to the firm moving forward.
"2022 saw cost inflation of low teens (Breedon believes the sector was high-teens, with Breedon benefiting from hedges) vs a previous guide of 10%. The key question will be what level of price inflation the market will require and can take after two years of meaningful cost increases," said analysts at UBS.
On Friday, the Derby, England-based construction materials company said revenue in the four months to October 31 was up 16% year-on-year.
For the 10 months to the end of October, revenue was 14% higher at GBP1.19 billion, compared to GBP1.05 billion in the same period last year.
Davy Research said the trading update was "not vastly different" from expectations, but noted that the incremental news around the revenue figures was "positive" - notably the win of a number of framework contracts, which Davy said would provide more volume certainty into 2023.
Shore Capital said the revenue figures were "stronger than expected". It said this was "entirely" due to price increases of around 15% on average required to offset higher input costs, particularly as volumes in the year-to-date were are down year-on-year.
The broker acknowledged, however, that this volume decline was "broadly in-line" with the wider construction market.
Looking ahead, Breedon said it is on track for record earnings this year, though it noted a "softening" in construction output so far in the second half of 2022, with its end-markets remaining "resilient".
UBS noted that Breedon is 50% exposed to infrastructure, 30% exposed to housing and 20% to non-residential construction.
"The outlook for infrastructure and parts of non-residential construction (industrial) is reasonably positive, with housing likely weak in the short-term," it said.
As a result, UBS said that market consensus expectations for 2022 earnings before interest and taxation of GBP144 million look "somewhat ambitious", putting its own estimations at GBP130 million.
Breedon's 2021 Ebit was GBP127.4 million, with underlying Ebit of GBP133.6 million.
Shore Capital kept its underlying Ebit forecasts unchanged for the full-year, but raised its revenue forecass by 9% due to Breedon's price increases. Though this is offset partly by expectations of lower operating margins due to high-than-expected input costs, it noted.
"We do not think Breedon's valuation fully reflects its exposure to the infrastructure, with infrastructure demand cycles in the UK and Ireland supported by state policies and at the start of a long, steady upturn," Shore Capital added.
Peel Hunt also kept its full-year forecasts for Breedon unchanged.
"We are happy for now to assume there will be a modest squeeze on the business next year, but that infrastructure activity will limit the hit to the business," it said.
It did admit, however, that "at this stage" calling estimates for 2023 and 2024 is "extremely tricky".
Shares in Breedon were up 6.1% at 60.70 pence on Friday morning in London. The stock has dropped 37% in the year-to-date, though Peel Hunt noted that this was in line with the peer group average.
In the past month, Breedon shares are up 15%.
By Heather Rydings; [email protected]
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