Description

Investment Summary

We believe SigmaRoc (“SRC” or “the Company”) is an exciting opportunity to invest in an underfollowed European aggregates/limestone operator that just completed a transformational acquisition and trades at 5x EBITDA/20% FCF yield vs comparable US businesses (ala MLM/VMC) which trade at low-single digit FCF yields and mid-teens EBITDA multiples. Notably, we believe SRC is superior to comps as SRC has CAGRed EPS 24% from 2019 to 2022 (vs 7%/9% for MLM/VMC) and converted 56% of 2022 EBITDA to FCF vs VMC/MLM at 32%/45%, respectively. We see an opportunity to make 3x our money over 3 years in SigmaRoc equity (which only requires the biz to trade at a 7x EBITDA multiple in our exit year, which is also SRC’s LT avg EBITDA) in our base case with a downside case limited to a flat 3-year IRR assuming an exit at 5x EBITDA (a multiple we can’t find any peers trading at). As will be discussed below, the strong cash conversion of this business and durable pricing power, give us conviction that any downside on this investment is extremely limited while there is very high upside from any business rerating or simply from cash flow harvesting.

Business/Industry Overview

Business Model

SigmaRoc is a European construction materials roll up focused on acquiring quarries in the industrial materials space. The Company was founded in 2016 as a cash shell via a UK listing by David Barrett, Max Vermoerken and Charles Trigg. Max is the CEO today and was formerly a strategic advisor to Lafarge and helped with its merger with Holcim and before that he was a private equity investor. The premise of SigmaRoc was that there is a rich opportunity for European construction materials M&A as the industry essentially has two different types of operators that provide significant roll up potential: European cement majors who are massive and have significant unloved noncore assets to sell with significant synergy potential and mom & pops. 

While we will have a lot more to say about their M&A program and the aggregate industry below, we believe the Company has executed extremely well since its founding. The Company has doubled EPS between 2018 and 2022 while keeping leverage flat. Moreover, they have executed M&A at an average EBITDA multiple of 6x, which we believe is attractive compared to aggregate operators that trade at double digit EBITDA multiples.

Aggregates Industry

Post their recent acquisition of CRH’s lime assets (which will also be discussed below), ~90% of SRC’s EBITDA will come from aggregates. Aggregates/Lime have been extremely popular businesses in the United States. The clearest comp to SRC in the United States would now be US Lime & Minerals (USLM) whose stock has doubled since 2018 and been a compounder ever since the company went public in the 90s. 

The reason aggregates are such an attractive industry is that they have pricing power. VMC/SRC only makes a revenue/gross profit per aggregate ton of $16/$6. Trucking costs are $0.3 per ton mile which means you can only transport these materials 15-30 miles before it becomes uneconomic. This makes quarries local monopolies with extremely high pricing power. Notably, during the GFC, aggregates pricing did not go down!

In terms of end markets, traditional aggregates are largely used in construction. Europe has seen an anemic construction market where volumes have been flattish over the last 5 years. However, despite flat volumes, the aggregates industry has CAGRed revenue ~6% of annually since 2017 driven purely by pricing.

Interestingly, Lime is a type of aggregate that is not exclusively used in construction. Lime, which has the same pricing dynamics as general aggregates, largely have their end markets split evenly between steel production (EAFs, which are a secular growth market in N. Europe where SRC operates, use significant lime to purify steel), agriculture (pH treatment) and paper production (transition from plastics, a tailwind to lime volumes). Pro forma for SRC’s recent Nordkalk and CRH lime deals, over half their revenue will come from these diversified less cyclical markets that should grow over time. 

Investment Thesis

1. Recent acquisitions of Nordkalk and CRH lime assets have dramatically improved SRC business quality 

2. SRC has better financial performance vs any European or US construction operator despite trading at cheapest valuation of group

3. Management team is strong and execution oriented 

1. Recent acquisitions of Nordkalk and CRH lime assets have dramatically improved SRC business quality 

In mid-2021 and December 2023, SRC management acquired Nordkalk from the Rettig Group and got shareholder approval to purchase CRH’s lime assets. These acquisitions have transformed SigmaRoc from a messy UK small cap (£150mm pound market cap) to Europe’s premier lime aggregate operator. 

In 2020, before Nordkalk, SRC generated ~50% of its revenue from UK/Channel Islands with about 50% of its revenue coming from lower ROIC products such as cement/asphalt/contracting. However, today, the Company generates ~60% of its revenue from Lime and another 30% from other aggregates (all high multiple businesses). Additionally, no country comprises more than 27% of SRC revenue.

Nordkalk gave SRC their initial foothold into lime. They acquired the business in mid 2021 at 7x headline/6x post synergy EBITDA. This was very attractive at the time when SRC was trading at 13x EBITDA (driven by a strong stock market that disproportionately helped European small caps). While we don’t want to overly focus on Nordkalk given the deal happened over 2 years ago and isn’t “new news,” it is relevant to say that PF for Nordkalk, over 40% of SRC revenue came from Lime from nothing previously.

In late November, SRC announced that it would acquire CRH’s European lime assets for ~£850mm for 7x/5.3x pre/post synergy EBITDA. We immediately liked the deal for several reasons.

1. CRH is a massive materials conglomerate focused on shifting their footprint to the United States. It makes all the sense in the world that some of their European assets could get overlooked and CRH would be willing to part ways with higher quality Euro assets to recycle into the US.

2. Acquisition leverages the lime platform SRC acquired from Nordkalk to create the premier European lime platform across Europe. Post this transaction, across nearly all SRC’s end markets, SRC+Lhoist will comprise over 70% of a country’s lime market. While the industry, as discussed above, already has very strong pricing power, our industry checks are that Lhoist is very keen to further improve pricing as a large, less focused lime operator in CRH has been removed and Lhoist European leadership has been refreshed with more a pricing mindset (similar to Lhoist US management).

3. Transaction increases SRC market cap by 60% and TEV by 160%. While we wouldn’t normally consider this to be a no-brainer investment highlight. We believe increased trading liquidity/scale given SRC is a sub £1bn company will end up significantly improving SRC’s multiple given its business quality. Additionally, SRC is buying the assets at a 5.3x post synergy EBITDA multiple, which while a slight premium to SRC’s current valuation, the assets are pure lime that are of high quality and significantly consolidates the industry as discussed above.

2. SRC better financial performance vs any European or US construction operator despite trading at cheapest valuation of group

SRC has executed extremely well since going public. We already discussed their M&A track record. However, their organic growth has also been best-in-class. As you can see below, the business has a consistent track record of double-digit organic EBITDA growth. Notably this includes both 2020 covid crisis and the 2022 European gas crisis where energy prices spiked on Russia’s invasion of the Ukraine.

Below we benchmark SRC organic growth, margins and FCF conversion to all US construction material peers. As you can see, SRC has dramatically outperformed nearly all peers on organic growth from 2018 to 2022 (growing at well over twice as fast as the peer group) and has double the FCF conversion rate of peers. What’s more, SRC has seen no negative estimate revisions vs peers. Despite all this, SRC is trading at a historic discount to peers both in the US and Europe on fwd EV/EBITDA. 

Today, SRC trades at 5x fwd EBITDA (near lowest levels ever despite strong execution). As you can see below, US peers range from 8-14x. However, CRH/SUM have significant, lower multiple downstream businesses. We believe MLM/VMC represent cleanest comps given their more aggregate pureplay exposure. Every turn of EBITDA multiple is worth 50% upside to SRC, implying significant upside to SRC. We will discuss valuation more below.

3. Management team is strong and execution oriented 

We have gotten to know management well over the last two years and believe they are best in class. Obviously, we have discussed their M&A and operational track record above. Additionally, as noted above they have strong backgrounds. 

• David Barret is the chairman. Previously, he founded London Concrete in 1997, which he sold to Aggregate Industries and Holcim later. 

• Max Verorken is the CEO. He played a big part as advisor to Holcim in its merger with Lafarge and was previously in PE at Genni Group.

• Charles Trigg is CTO. Before that he was head of Northern European capex at Holcim.

All three cofounders have strong operator mentalities that shines through when you meet them and in the results above. They are also highly responsive to investors and strongly recommend you reach out. 

Compensation is also set with annual bonus driven 75% by EPS growth and 25% corporate objectives (ie leverage targets, etc). LTIP is also set 75% by EPS growth and 25% by 3 year total shareholder returns. All in, we believe this is a solid compensation structure. Yes, there are some risks around using leverage to juice EPS growth on M&A. However, pre-CRH deal, leverage has been steady. 

Valuation

Below is the PF financials of SRC for the CRH deal. Today, the Company is runrating £232mm of EBITDA and £85mm of FCF. If you assume they can achieve their synergy target, the runrate EBITDA/FCF would be £271mm/£117mm. This implies an entry valuation of 5.9x/5.1x pre/post synergy EBITDA and 16%/22% pre/post synergy FCF. SRC has traded on average at 7x fwd EBITDA and comps trade at double digit EBITDA multiples.

Base Case Returns: lets assume EBITDA/FCF grow by 5%/8% respectively (well below historical averages) and they can achieve their target synergies (this assumes no growth off current runrate in 2024 and then two years of growth with an exit of investment in YE2026). Over that time frame, SRC will generate £380mm of FCF and generate £300mm of EBITDA in FY2026. If we assume an exit at 7x (SRC’s LT average valuation which is still very cheap to comps), that implies a £2.1bn TEV at exit. Net debt is £837mm today. Let’s conservatively assume all FCF just sits on balance sheet, so that implies Net Debt of £457mm by YE26. Therefore, SRC will have a Market Cap of £1,643mm with 1,098mm shares. This means an exit price of 150p vs current SRC price at 53p. On assumptions that I believe are all largely conservative, you will triple your money in SRC in 3 years and make a 42% IRR.

Bear Case Returns: Given these are hard assets with pricing power, I don’t believe this a very credible case for these assets to not at least maintain their current earnings power on a 3 year hold. However, I assume SRC fails to achieve any synergies. It is hard to believe SRC would trade for much lower than a 5x exit EBITDA multiple as no comps trade lower than that. I assume an exit at 5x £232mm of EBITDA, for a £1,160mm TEV. You generate £255mm of FCF so net debt falls from £837mm to £583mm by exit. That implies a 53p fair value or 0% 3 year IRR in a bear case.

Upside Returns: Framing upside when base case returns are so high seems unnecessary, so I’ll leave it at every incremental turn of EBITDA at exit is worth 27p or an extra 8% IRR on our conservative base case growth rates. For example, if SRC is able to achieve our base case underwriting forecasts and get a 10x EBITDA multiple, the stock would be worth 230p at exit or a 64% 3 year IRR.

Investment Risks

1. Leverage is high post the CRH deal. If you include the discounted value of the CRH earnout, leverage is 3.6x EBITDA post deal. This is obviously very high. However, the business is very cash flow generative and management is going to steadfastly pay down debt over next few years. The business is defensive and has pricing power, so leverage isn’t too much of a concern. 

2. Recession could impact the business. Half of SRC revenue comes from the cyclical construction end market. However, as said many times in this write up, these businesses grow pricing even in downturns. The European economy has been weak for a while and therefore if anything, I expect upside risk to volumes/pricing in coming years. Additionally, SRC is much more diversified across end markets than other construction material peers. 70% of costs are also variable, meaning operating leverage in this business is low.

3. SRC has been very focused on M&A and management could do a bad deal/destroy shareholder capital. While that’s always a risk, we like management a lot here. They also have committed in writing to raising no additional equity for M&A deals. We believe the strong track record and near-term focus on deleveraging should mitigate risks.

4. Lime assets emit CO2. Over next few years, Europe will begin taxing companies for emitting CO2. This has been a big fear by the market on cement CO2 emitters like Heidlberg and Holcim. However, we view CO2 as an opportunity, not a threat for lime/SigmaRoc. Lime is burned at lower temperatures (ie CO2 is emitted slowly and more cleanly) and lime kilns are much smaller than cement. SigmaRoc already has the tech to capture the CO2. Therefore, we believe the burden of CO2 will fall on the smaller mom & pops who have not invested in CO2 capture technology. This should steepen the cost curve/raise pricing for lime without a corresponding increase in SRC’s cost structure. 

Catalyst

FCF generation, rerating to sector, capital allocation