Venture: Mid-Cap Materials

Issue 16;

Rock solid.

SigmaRoc Plc (SRC)

“SigmaRoc PLC is an AIM-quoted lime and industrial limestone group targeting quarried materials assets in the UK and Northern Europe. It seeks to create value by purchasing assets in fragmented materials markets and extracting efficiencies through active management and by forming the assets into larger groups. It seeks to de-risk its investments via strong asset backing at its projects.”

Lime is used for food, animal fodder, glass, paint, plaster, construction, steel, sugar, and ceramics. Demand is deemed to be relatively stable and will increase as the world decarbonises.

Last November, CRH Plc (CRH) sold its European lime operations to SRC in an £870 million deal, with operations in the UK, Ireland, Germany, Czech Republic and Poland. This provides an opportunity for SRC to become the European leader in lime, which is essential for the green transition. CRH had deemed these assets to be non-core. According to SRC, the enlarged group is expected to be significantly cash generative with an additional £100 million free cash flow and £211 million of profits.

The deal was complex with three phases, partly funded by a placing in November, some additional debt, and CRH will end up with a 15.39% stake in SRC. That is encouraging because it means CRH wants SRC to succeed in a business that, to them, will be core.

The analyst at Liberum described the deal as a once-in-a-lifetime opportunity because it was extremely complimentary to SRC’s existing assets and market position. Synergies would be achieved with the existing business, and SRC would emerge as the industry leader in Europe.

Their plans revolve around a programme called invest, improve, integrate and innovate. They say their fixed costs are manageable, and the barriers to entry are high, resulting in pricing power. They empower local managers to control costs and remain agile. They sell products locally and add downstream activities to boost margins and maintain a competitive edge.

The CEO, Max Vermorken, worked in venture capital before becoming the advisor to the CEO of cement producer Holcim. SRC was formed in 2016 via a shell company on the London Stock Exchange. The chairman, David Barrett, is a serial entrepreneur in the construction industry with 40 years of experience. Charlie Trigg, the CTO, spent a decade prior to SRC as a minerals processing engineer across the globe, building plants and running operations. Alphons Vermorken, likely a relative but that doesn’t concern me, is an ex-fund manager and computer coder. It’s a good lineup of people with diverse skills, and the team has remained united since the start.

SRC has an acquisitive business model and have seen their earnings per share grow each year for the past five years. The company insiders have been persistent buyers, and notable shareholders include Nigel Wray, who once wrote the Fleet Street Letter.

The balance sheet is strong, and the level of debt is commensurate with activities. The debt market is comfortable with the situation thus far. The shares trade on a forward price to earnings of 8x, and there is no dividend at this point.

The four analysts are all buys, with a target price of 103.5p (range 90p to 120p) against the current 62p, implying a 67% upside. I believe the investment case is that they are recognised as having integrated 15 companies since 2016, and find themselves in a dominant position within Europe. The company was a small-cap a few years ago, and is now a mid-cap, and is likely to move to the next step over the coming years. The shares are under-owned and not widely known, yet it is shooting up the league tables.

Risk

This is an acquisitive growth stock that targets cash-generative assets. The company is diverse in terms of customers and geography. Risk could come from the balance sheet in the event of a severe downturn, but the company claims demand for lime is stable. Volatility is medium to high at around 35%, and the shares typically trade £500k per day. I deem this to be medium to high risk.

Venture Update

Until now, Venture has been a free add-on to the Morris on Markets and the Professional packages at ByteTree Research. Now that it is up and running, with its 16^th stock, the time has come for it to become a standalone service. It is our highest return offering, with less liquid stocks, meaning it must maintain a degree of exclusivity. Furthermore, the reason so many UK stocks trade so cheaply is explained here. Once in a lifetime.

We are planning to price Venture at £50 per month, which will be added to the packages. As always, I offer the opportunity for feedback before we make this material change.

Note: Prices are recorded at the time of recommendation, which is in keeping with best practices in stockbroking.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture