Lucrative holes in the ground
Construction-materials group SigmaRoc will bene t from the sector’s long-term growth in Europe
In Ed Conway’s fantastic book Material World: A Substantial Story of Our Past and Future, the author draws a clear line between the dematerialised and the materialised world. This is something few of us ever really think about in our dematerialised world. We rely on technology and services and tend to overlook the infrastructure behind them.
That’s where the material world comes into play: the gigantic copper mines that produce the metal for the wires transporting electricity around the country, for instance; or the sand mines that produce the silicon for the microchips in our mobile phones and computers. Most of the jobs in the material world are dirty and hard work. Because these are raw materials in commoditised markets, value is only added further up the value chain, so profits are never guaranteed and are often volatile.
It is for these reasons that investing in the material world can be so profitable. The world generally ignores these industries and as a result they are often plagued by underinvestment. A lack of investment can lead to supply shortages and price spikes. These booms are usually followed by busts as higher prices draw investors back to the market, but this is starting to change. It’s becoming harder and harder to extract resources the world over. Environmental concerns, planning constraints and dwindling resources are making it far more difficult to meet the world’s insatiable demand for resources.
Construction play
SigmaRoc (Aim: SRC) is an interesting play on this theme in the European construction market. The group first rose to prominence in 2017, when it completed its first acquisition, Ronez, a wholly owned subsidiary of Aggregate Industries, part of the LafargeHolcim Group, for £45m in cash. Ronez is the leading quarrying and construction materials producer in the Channel Islands.
This was the first of many deals that SigmaRoc completed in subsequent years in order to form a £500m constructionmaterials business. Construction aggregates are hardly glamorous, but they are crucial. These are the materials that help us build houses, roads, airports, and offices.
The chair of SigmaRoc is David Barrett, who cofounded London Concrete in 1997. Although he later sold the business to Aggregate Industries, today the company is the number-one concrete supplier in London. The rest of the company’s management team is replete with entrepreneurs and experienced individuals from the world of building aggregates.
The CEO, Max Vermorken, was a strategic adviser to the CEO of LafargeHolcim Northern Europe, the world’s largest construction materials group. Emmanuel Maes, the group’s chief development and acquisitions director, who joined in 2019, grew the Belgian company Group De Cloedt (which specialises in the production of sand and gravel) from an annual turnover of €40m to one of €240m through organic growth and acquisitions.
SigmaRoc has been snapping up assets other companies don’t want, using a combination of equity issuance and debt to fund its growth. Revenue has grown from £70m in 2019 to £580m in 2023, and is expected to hit £1.1bn in 2024. It is expected to jump in 2024 following the acquisition of CRH’s European lime business last year. The deal has made SigmaRoc the leading supplier of lime and limestone across northern Europe, with the company becoming the market leader in at least five European countries. In most markets, there are only one or two other suppliers and barriers to entry for potential rivals are enormous. The planning and environmental hurdles required to open new lime and limestone mines in most of these markets are so high that most companies would be disinclined even to contemplate such a venture. For example, SigmaRoc completed the acquisition of CRH’s UK lime operations at the end of March, and here it is virtually impossible to get new houses off the drawing board, let alone a lime quarry.
Realising value
Now that the group has acquired these competitive advantages, the company has the potential to generate £100m in free cash flow per annum, analysts at Liberum believe. This could signal the end of SigmaRoc’s need to raise more cash from investors and allow it to reduce debt rapidly. The long life of quarries acquired by the group means it can generate significant cash flow for many years to come without significant levels of capital spending.
What about the demand side? Estimates vary, but it is widely believed that Europe will have to spend in the region of several hundred billion euros a year upgrading its infrastructure to hit net-zero targets and replace old assets over the next decade. As a key supplier of materials in several major European markets, SigmaRoc will almost certainly benefit from this spending.
Shares in the company look relatively undervalued, considering its position in key markets, demand growth for construction materials over the next decade, and ownership of what could be described as unique assets. Liberum has the company trading on a forward price/earnings (p/e) multiple of 8.4, compared with 11.3 and 13.8 for peers Breedon and CRH. The stock is trading at a 2025 p/e of 6.5.
Now SigmaRoc is in a position whereby it can fund its own growth and pay down debt it deserves a rerating. The stock’s three-year average p/e is 11, and even a return to this level would leave the shares trading at a small discount to the peer-group average.