Monday 16 July 2018

Summit Materials well placed to profit from US construction boom

 

'Taking advantage of a recovering construction market while using a tried and tested approach to acquisitions, Hill and his team has succeeded in building Summit Materials into one of the most attractive building materials companies in the US' (stock photo)
'Taking advantage of a recovering construction market while using a tried and tested approach to acquisitions, Hill and his team has succeeded in building Summit Materials into one of the most attractive building materials companies in the US' (stock photo)

David Holohan

It may seem unusual to establish a North American building materials company during an economic downturn, particularly if that downturn was the worst since the Great Depression.

In 2009, that challenging macroeconomic backdrop provided Tom Hill with the opportunity to create Summit Materials and lay out a growth plan that would allow his team to create a best-in-class organisation, formed at the bottom of the construction cycle. Having run CRH's US business for several years, Hill was one of the most well connected, knowledgeable people in the sector with an unbeatable record of accomplishment and of successfully building one of the largest building materials companies in the US.

The prospect of setting up a new building materials company, staffed by some of CRH's most senior executives that had left the behemoth group, appealed to private equity investors who invested in Summit Materials - providing the company with the cash to make acquisitions.

Taking advantage of a recovering construction market while using a tried and tested approach to acquisitions, Hill and his team has succeeded in building Summit Materials into one of the most attractive building materials companies in the US. It has made more than 57 acquisitions since 2009 and is well placed to continue to complete several deals every year. Summit now operates from 21 states, the most important being Texas, Utah, Kansas, Montana, and Virginia.

The management team was very selective in the assets it acquired, ensuring that the company is the number one market player in most areas that it operates in - and within the top three across the entire portfolio of companies it owns.

Summit's split between markets is 37pc public and 63pc private, with most public spending related to infrastructure. The outlook for both market segments is positive over the next several years as infrastructure spending increases - coupled with increased private construction levels.

As it is very difficult to get planning permission for cement production facilities in the US, there is limited new supply entering the market, supporting cement prices for the existing producers. With this positive market supply backdrop, Summit Materials boasts some of the strongest profit margins in the sector coupled with the strongest growth prospects.

With a market capitalisation of $3.5bn (€2.9bn), the company offers the joint attractions of being a possible acquisition target in a consolidating sector - and a company that is the right size to double in value every five or six years if management continue to make accretive acquisitions.

CRH recently acquired US company Ash Grove Cement for $3.5bn and while another building materials company Martin Marietta paid $1.6bn (€1.3bn) for Bluegrass Materials, a leading aggregates company. As the sector continues to consolidate, the number of potential targets with values of more than $1bn (€842m) will continue to fall and quite possibly, Summit Materials will see its position change from being an acquirer of companies - to being a target.

While the building materials sector is cyclical, many of the indicators in the US suggest private sector construction is in the early stages of an upward cycle. The Trump administration is also likely to focus more attention on infrastructure spending increases in 2018.

Summit Materials looks set to be a significant winner against that backdrop.

David Holohan is chief investment officer with Merrion Capital

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