Construction BUSINESS

RBC Capital Markets has initiated coverage on Breedon, a major player in construction materials, with an ‘outperform’ rating and a 575p price target. The firm faces a critical decision between two strategic paths: opting for the ‘blue pill’ would mean focusing on a steady income and doubling dividends through successful UK acquisitions. Alternatively, choosing the ‘red pill’ involves pursuing ambitious growth, potentially venturing into the US market with an initial war chest of £400m and the prospect of creating a £4bn US business if successful.

Breedon’s rise to a market-leading position in the UK heavy building materials sector, coupled with its successful acquisition strategy, has established formidable barriers to entry. However, RBC notes that competition authorities may limit transformative acquisitions in the UK or Ireland, leading to a potential shift in focus towards generating and returning cash to shareholders. The ‘blue pill’ scenario predicts a significant increase in the dividend per share, resulting in an attractive FY2025E price-to-earnings ratio of 7.6x and a dividend yield of 7.9%.

On the other hand, the ‘red pill’ signifies Breedon’s ambition to replicate its success in the US, with an estimated initial war chest of £400m. While RBC acknowledges the uncertainty surrounding this move, it could lead to substantial growth and create a £4bn US business if successful. The decision between the ‘blue pill’ and ‘red pill’ options reflects distinct investor preferences – steady income or growth – and Breedon’s choice will significantly impact its trajectory in the construction materials landscape, keeping investors on the edge of their seats.

Source: ShareCast

Image Source: Breedon website