Member Info for londoner7

My medium term horizon on Breedon is 5 years (-2020) and I see the outlook as favourable, based on management, the current UK economic situation, the (general) political and public support for housing, and after the slow build up in infrastructure an element of catch up after 5 years of neglect. So the business looks good. What about the stock? Based on 2014 PE the stock looks rich, but less so based on recent growth rates. First half growth versus 2014 H1 was 77% on earnings (1.3p), 14% on organic revenue and 28% on total revenue. ROC has been picking up, obviously held back during the aggressive growth phase but looks like hitting 15% this year. In a previous post I tried to make the case for at least same again earnings 2nd half. My analysis is actually more detailed than that and I’ve come up with a figure >2.7p. However, I’ll stick with 2.7p, I don’t want to scare the horses! That would bring the PE below 20 for the current year and back onto investor’s radar. As a medium to long term investor, aside from the prospects for the business, my attraction to Breedon is based around their 15% target for EBIT by 2020, their confidence in achieving this target, and their ability to bolt-on acquisitions using their free cash flow - £20m- £30m pa spending on acquisitions could add £20m annually to revenues. In practice I would not be surprised if an opportunity arose which exceeded their cash flows – great if it’s funded by debt rather than a dilutive equity placing. The directors have a lot of skin in the game so an equity placing is less likely, barring a very large or non-aligned acquisition which might question my investment thesis. So put these numbers (Revenue, EBIT margin, predictable numbers for tax and interest costs) and number of shares for column years 2015-2020 into a spread sheet. Add in a couple of growth variables to the revenue line, (i) organic growth and (ii) additional revenue through acquisitions, and it gives you a forecast for earnings based on hitting an EBIT margin of 15%. Continued ...

Hi Cellis, Yes, I thought the board looked a bit quiet, but I’m happy to post anyway, whether users respond or not. When I’m analysing a company I like to record my arguments for and against. It’s a throwback to daily reports I produced during life in business. It might prompt an informed comment. I haven’t seen Breedon on any other boards. I agree, Breedon has a solid and it appears stable list of institutional investors. I looked at Marshalls while reviewing Breedon. It looks an attractive business with a good ROC but with more bells and whistles than Breedon which makes its business model harder to predict. Also, it looks more expensive. On balance I decided on Breedon for the long term and predictability. I’m also attracted to the fact Breedon is on AIM offering IHT benefits. Marshalls, like many shares is targeted by automatic trading platforms. This helps liquidity and generally offers better trading opportunities if that’s your game. On the other hand I’d guess Breedon is very tough to trade outside of the results period – it’s bought and sold by fingers on a keyboard. But for the patient investor a better chance to pick some shares outside the results period. After the recent results I never expected to be able to add below 50p so was delighted to fill my stake today. I’ve no idea where it will be next week but I’m confident of where it will be a few years from now. Londoner7

House building – Yesterday I read a piece in the FT about Q1 UK planning approvals over 50K, the highest since 2008, and a follow up comment that it was expected to lead to increased building in the 2nd half. All factors considered, I’m optimistic about Breedon’s 2nd half performance. The pricing on Breedon is rich based on last year’s earnings (PE 30). But once 2015 earnings become more apparent that particular obstacle should dissipate. For what it’s worth my expectation is 2.7p earnings versus consensus broker forecasts of 2.3p. Perhaps this clarity will come with a late November trading update but what I’m really hoping for is news of an acquisition or bolt-on. I'm new to this board. I try to avoid pumping and dumping comments (although I may occasionally get carried away) preferring to stick to a discussion of numbers. I study companies and their accounts in depth but accept that I sometimes make an incorrect interpretation. I'm happy to be corrected and always try to correct any errors I see first. I'm only a bit player in trading preferring long term buy and holds and try to follow the buffet style of taking advantage of Mr Market. I've recently added Breedon as a core holding with a 5 year outlook. I post here in the hope of critical responses, or affirmation of facts and numbers. Londoner7

You beauty! After the interims I never expected to be able to add to Breedon below 50p. The analyst call was one of the most upbeat assessments of a business I’ve heard since the dot com bubble. But nobody could call Breedon ‘vapourware’ – ‘gritware maybe. If you missed the call go to their website and you’ll find the recording under documents’. Also open the accompanying presentation. For me the key take out was the 15% target for EBIT margin by 2020. This replaces the previous target of 15% for EBITDA margin, which was reached with 17% EBITDA achieved in the first half. With regard to the 2nd half there was an interesting Q&A discussion about the factors that may adversely impact the 2nd half compared to the 1st half. The top three were, increasing oil prices, weather and comparisons with a record breaking March performance. Oil price – charts of the oil price are readily available but I’ll assume that a key product for Breedon is diesel so I’ll focus on the price of diesel. After a dip in Q1 the price rebounded during Q2 settling at a plateau through May and June, which marked the end of the first half. No doubt the impact of this price increase late in the first half would have been clear in the numbers – hence the comments during call. However, this marked the peak of the rebound with the price falling dramatically by mid July. Using DECC weekly data: the average price of diesel compared to 2014 H1 was, Q1 -14.9%, Q2 -11.8% and Q3 (to date with 3 weeks to go) -16.8%. To clarify, Q3 prices are below Q1 prices so this is one potential 2nd half head wind that is turning into a following wind. Of course oil prices are erratic and may rise again during Q4 but a key reason for the decline and for diesel going below the price of petrol in the UK was a new supply of diesel to Europe from new refineries in Saudi Arabia. This influence will be long term. Weather – who knows what will happen, certainly not the met office. If it never rained we’d never have pot holes to full! March comparison – March was described as ‘the perfect storm – in reverse’. One factor was the tendency for councils to spend their capital budgets before the end of their financial years and March typically is a good month – so it’s seasonal. It was stated that Sept and Oct are also typically good months, so perhaps a 2nd half balancing. Other near term factors: Integration of Barr - At the 2014 finals Breedon stated that the integration of Barr would impact 2015 margins (from memory I have -0.3% in mind). In the event Breedon stated at the interims that the expected two year integration plan is one year ahead – after 8 months. With the 2.5% overall improvement in EBITDA margin this suggest that integration momentum will continue into the 2nd half. House building – Yesterday I read a piece in the FT about Q1 UK planning approvals over 50K, the

After reviewing the 2015 interim presentation I need to clarify my net debt increase number of £1.26m. Net debt includes a £2m deferred payment for an acquisition made last year, so absent this the debt trajectory is better than I stated - positive. In the presentation the numbers look very good compared to 2014H1 but the 2014 FY presentation highlighted the H2 performance which was expected to carry through into 2015. On many fronts it has but EBITDA hasn't. In 2014 H2 it was £5m but in 2015 H1 it's fallen back to £3.8m. Versus 2014H2 rev +20%, cost of sales +15%, admin costs +25%, net interest payments down £150K, but this is only deferred following the July changes in debt. This explains the drop in EBITDA. Bottom line. The current debt situation is not as bad as I first thought but the ability to pay it back is less clear to me. I'll wait for the 2015 final report for clarity. In the meantime I wish a long cold calm winter to existing Alkane shareholders - It would blow through VSA's estimate of 18GWh for H2 power response. A tempting consideration, maybe I'll keep a finger on the trigger. That said I have another hedge on a hard winter, which doesn't leave me so twitchy. Londoner7

I have a problem with this VSA Capital report. To get to FY rev of £21.4m requires almost a 50% increase over H1 revenue. Where is this coming from? I expect baseload production to remain stable, albeit on a price closer to £51/MWh in H1 versus above the £52/MWh for H1 based on 94% contracted at an average £52/MWh. So a flat baseload in H2 compared to H1 would be a good result. So that leaves Power Response. In H1 this was 15% of total output (14GWh). The lull in STOR supply before April was because Alkane overbid on the auction and due to the mild winter didn't get the calls. Pricing was less agressive post April hence the STOR supply which should be maintained through the coming winter. Spark spread is good and we may have a serve winter but can Power Response make up that revenue? Perhaps but I'd like to see VSA make the case adding some detail to numbers rather than generalities about power station closures etc. I've been following Alkane for 7 years. I love the story and the potential but for me the UK power crisis scare is losing its edge. It was 2015/2016, now I hear it's 2016/2017. I was looking for similar FY numbers to VSA but my H1 numbers were £2.16m PBT and 1.3p earnings. H1 results have come up short and I can't see them being made up by year end unless there is some dramatic impact in the energy market over the winter. In its absence baseload prices next year be 4-5% down and remember CMM supply falls over time. Can the balance sheet hold out till 2016/2017? For the last 5 years ROC has been between 5-6%. Based on same again H1 it will be 4.2%. Alkane's cost of capital is higher. Demonstrated by the modification to their debt terms a few months back and the increase in net debt reported in these results. These are the first clean results I've seen from Alkane in 7 years, i.e. no acquisitions, asset transfers or share placings (which have been most painful), so net debt increasing by £1.28m in what should have been a good 6 months is a worry and barring a serve winter is likely to be as good as it gets for the next 18 months. I've decided to sell out but with considerable time invested in Alkane and a good insight into their business I'll watch with interest hopeful of getting back in when I feel more comfortable with the balance sheet. I'd be interested in any informed views on the balance sheet or my assessment of H2 prospects. Londoner7