Sunday 25 February 2018

There's money in helping to keep the world warm

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The insulation market could soon be worth €50bn

John Lynch

A few years ago Denmark was chosen by the Chinese government as a case study in reducing carbon emissions.

The reason the Danes came up trumps was not only government policies but the impact of companies like the one we are analysing this week, the insulation specialists, Rockwool International.

The big secret in business is to spot a growth sector; get in on the ground floor and use a raw material that's plentiful and uncomplicated. Rockwool, based in Copenhagen, has been a pioneer promoter of insulation products, a market that we can safely say has taken over the world.

The global insulation market four years ago was said to be worth €30bn; three years from now, if expert predictions go to plan, the market will be worth €50bn.

That's a compound annual growth rate of 8pc over a seven-year period and offhand I can't think of another sector that will match that sort of performance.

Moreover Rockwool's raw material is stone wool, a fibre made from melted volcanic rock, one of nature's abundant resources. The material qualifies as 'green,' being used domestically and industrially and even in sub-sea pipelines; it is also durable, being able to withstand very high and extremely low temperatures as well as being water-resistant. And, as the Chinese found out, it's helpful in reducing CO2 output.

Founded in 1937, Rockwool has been a slow starter but it got a burst of life in the late 1980s when it entered North America, setting up a facility in Toronto, Canada. In the wake of the fall of the Berlin Wall, it expanded eastwards to Poland, Russia, and the Eastern Bloc. It now has 28 factories in 18 countries and employs some 11,000 people.

Like the hugely successful Irish company Kingspan and the British outfit Sheffield Insulation Group (SIG), Rockwool concentrates entirely on insulation products. Its business is divided into business and building insulation divisions.

The latter includes roof insulation, facades and industrial applications such as insulation for ducts, pipes and boilers. Its business insulation division supplies stone wool cladding, ceiling tiles and engineering applications such as brake linings and gaskets.

Interestingly the company, with a view to the future, believes that stone wool products cannot stand alone because of the rapid changes in construction and the performance demanded of new building. So it has invested heavily in R & D. It is reckoned to have spent €32m last year alone. Recently the company bought subsidiaries in America and Germany that are exploring new technologies.

Rockwool's main market is Europe, which contributes 80pc to group revenue. Sales last year were mixed; France and Germany, its two biggest markets, were sluggish, while Eastern Europe was strong. The company closed its plant in Northern China but the rest of Asia is buoyant.

Over the last decade, annual growth was 6.5pc and sales in the last five years have increased 50pc to €2.2bn last year. Operating profits have increased from €106m to €161m in the same period.

Its share price has moved from €66 in 2010 to a record high of €150 earlier this year. Today, they trade close to €120, giving it a market value of €2.5bn. Its shares are not cheap, and almost a quarter of the stock is controlled by the Rockwool Foundation, setup by the Kahler family which got the whole thing started in 1937.

Some investors like to plump for a sector and pick one company to carry their sector ambitions.

A punter who wants a pure insulation play would have a choice between SIG, Kingspan and Rockwool. SIG, because of the present strength of Sterling, rules itself out, so the pick is Rockwool or Kingspan.

While both company fundamentals are good and the price earnings multiples for both almost the same (far too high), the markets in which they operate make the difference.

Kingspan inhabits the superior markets of the USA and UK, while Rockwool's focus on France, Germany and Russia. That, I think, would give the Irish company the edge but Rockwell is still a good investment.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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