Building momentum: Five UK builders on the rise as construction sector rebounds in 2024

After a subdued 2023, the UK construction sector is showing signs of a resurgence. Optimism within the sector is on the rise, with results from the latest RICS UK survey revealing a positive outlook for 2024, mostly driven by expectations of an interest rate cut later this year. RICS found that optimism among builders was highest at the 12-month outlook, i.e. they are remaining cautious for now, but expect accelerating growth into Q4 2024 and beyond. For investors looking to buy into builders, this is a time to pay attention.

While RICS also identified ongoing challenges, most notably persistent skill shortages, it wasn't alone in its assessment of rising optimism. The S&P Global/CIPS UK PMI for the  construction industry showed an improvement from 46.8 in December to 48.8 in January - the highest level in two years. While a score below 50 still indicates a decline in activity, the clear trend is toward growth. The large jump in one month beat consensus expectations of 47.3 by 1.5 pts. New orders also showed the slowest rate of decline in 8 months, suggesting the industry is about to turn the corner.

The expectation that the Bank of England will cut interest rates this year, possibly more than once, is lifting sentiment across the economy. Lower borrowing costs and higher consumer confidence should boost construction activity and the broader economy in H2 2024. The wider all-sector PMI confirmed this as well, rising to its highest level in 8 months to 52.6 from December's 51.7.

In this environment, we see UK builders as potentially attractive buys in H1 2024 to help position your portfolio for the upcoming interest rates cuts. To help guide you, we have compiled a list of 5 companies to follow through the construction industry's expected turnaround:

Lords Group Trading

Lords Group (LORD) Follow | LORD, a UK distributor of specialist building, plumbing, heating and DIY products, has seen resilient trading in recent quarters amid growing demand for sustainable heating. The group has grown much faster than its peers while cultivating a strong customer-centric culture, acting as key differentiator in winning greater market share from its larger rivals.

In its most recent trading update, Lords reported a  FY23 adjusted EBITDA and PBT of £26.6m and £11.0m respectively on sales up 2.8% year-on-year to £463m. Additionally, net debt declined £9.5m in H2'23 to £28.5m (vs £38.0m in June) - or <1.5x EBITDA, pre IFRS16 - on the back of tight cost control, operational efficiency, and an inventory unwind.

Going forward, net debt should continue to fall given the cash generative nature of the business - with FY24 adjusted EBITDA coming in broadly flat year-on-year, and 45% of group turnover coming from the economically more resilient repair and maintenance sector where millions of UK properties still need modernisation.

Elsewhere, the group is widening its renewable energy product range, including heat pumps, in order to help families save money and meet the country’s decarbonisation goals. At 52p, the stock offers significant potential upside, alongside a healthy 4.6% dividend (2p) yield. Broker Cavendish maintains a 106p price target.

Marshalls

Marshalls (MSLH) Follow | MSLH, a leading supplier of landscaping, building and roofing products, has seen its stock rally 55% since mid-October on optimism the business will recover following profit warnings in H1 2023. Since then, Marshalls has streamlined operations, enacted cost cutting measures, and appointed a new CEO. In its most recent trading update, the company announced in-line profit before tax for the 3 months from October 18 2023 and a 7% year-on-year reduction in revenue.

The decline in revenue was attributed to lower demand and subdued activity in private housing RMI last year. However, as mentioned in the introduction, demand in the building sector appears to be at a turning point, and we expect Marshalls to follow the overall trend upwards. The group's balance sheet remains robust, with good progress made to reduce leverage as it ended the year with pre-IFRS16 net debt of £173m, down from £191m a year ago. Strong cash generation during the year also enabled a £30m reduction in the group's term loan to £180m in January, while its £160m credit facility remained undrawn.

Furthermore, Marshalls' cost cutting measures have proven effective, expected to deliver savings of £11m while a programme of surplus land disposals generated £7m last year. At the same time, the group retains latent capacity across its businesses to meet significantly higher demand than current levels.

Brickability

Brickability (BRCK) Follow | BRCK, a construction materials distributor, is in a similar position to Marshalls, with its stock up 52% since a recent bottom in October as market sentiment on the sector has turned positive. The group's most recent update for FY24 to March 31 demonstrated resilience against a challenging macroeconomic backdrop as market volumes for bricks in the UK have declined over the past 12 months.

Still, Brickability is expected to deliver FY24 adjusted EBITDA within market expectations, albeit toward the lower end, thanks to its diversification efforts and good performances in the Distribution and Contracting divisions, partly offsetting lower performance in Bricks and associated building products. The Distribution division traded well, despite the slowing of private housebuilding and residential RMI markets, and gross margins remained strong. Likewise, the Contracting division performed well after the recent integration of Topek Holdings and TSL, reporting increased levels of enquiries for the 2 companies within the enlarged group.

Brickability has acquired 14 businesses since IPO in 2019, and the slowdown of the bricks market has not prevented it from pursuing its diversified multi-business strategy. Most recently, it acquired Topek Southern Ltd for £48m, which delivers facade systems, fire remediation, roofing, and curtain wall products to hotels, student accommodation, office buildings, sports stadiums, and others. It is expected that the acquisition will be earnings accretive in the first full year. As BRCK continues to expand its product range and add higher-margin revenue streams, we expect a recovery in the Bricks division in late FY24 and FY25 in line with the overall market trend, and further M&A and growth ahead.

SigmaRoc

SigmaRoc (SRC) Follow | SRC, a lime and limestone group with quarried materials assets in the UK and Northern Europe, recently issued an upbeat trading update for FY23 to  December 31, 2023 as industrial mineral markets have outperformed expectations, offsetting softer residential construction markets. SigmaRoc reported underlying FY23 EBITDA and EPS ahead of consensus expectations, up 10% to £116m and >8p respectively. Underlying EBITDA margins also improved to 20%, up 110bps year-on-year as revenues rose 8% to £580m. SRC shares are up 17.8% year-to-date.

SigmaRoc implemented several streamlining and cost saving initiatives last year, translating into annualised savings of c. £4m while newly acquired businesses were reported as performing ahead of expectations. Most recently, SigmaRoc acquired a large portfolio of lime and limestone assets from CRH, the first phase of which completed on 4 January 2024, alongside a £200m equity fundraise. The move brought to SigmaRoc 1 billion tonnes of reserves, over 850 employees and annualised revenues of over €350m, significantly scaling up its industrial minerals business.

Overall, SigmaRoc has strong momentum following multiple acquisitions in FY23, which are integrating well and presenting exciting opportunities for diversification and scaling up the core business. Demand for lime should continue to climb across construction, industry and other sectors as it is an essential product for the green transition.

Michelmersh

Premium brickmaker Michelmersh (MBH) Follow | MBH reported resilient trading in its most recent Q4 update, with full-year profit and cash anticipated to be in line with market expectations. Final results will be out on March 26, 2024 and we expect to see momentum from H1 2023 carried into H2 and FY24 as the group's strong opening order book defied last year's decline in the brick market.

As for H1 2023 results, Michelmersh bucked the trend during a difficult half for the industry, delivering an adjusted pretax profit increase of 11.5% to £6.8m, a revenue increase of 23.5% to £42.0m, and an adjusted EPS increase of 11.9% to 5.73p, all reflecting the benefits of its diverse end markets. Net cash also jumped by 19.2% to £11.8m, alongside an undrawn £20m borrowing facility. FabSpeed revenue was included in group results for the first time since its acquisition in November 2022. MBH also launched a new website sustainablebrick.com, highlighting the benefits of clay brick.

The group is managing input costs effectively, and continuing to hedge energy costs alongside investment in solar to supplement its long-term energy requirements. An interim dividend of 1.5p was declared, up 15% year-on-year, highlighting confidence in the outlook for the business. As MBH managed to deliver impressive performance despite difficult macroeconomic conditions, we expect momentum to accelerate as interest rates drop and the macro environment improves. As of Q4 2023, Michelmersh is operating at full manufacturing capacity.