Growth Bought, Not Earned

Breedon Group PLC — a vertically integrated producer of construction materials across Great Britain, Ireland and the United States. All figures in pounds sterling. Share price of 320.60p is as at the valuation date of 5 August 2026.

Breedon Group is a producer of construction materials. These include polished stone, sub-base materials, sands for the road construction industry, milled bluestone for agriculture, asphalt, ready-mixed concrete, concrete beams, concrete blocks and cement. The tagline is "Make a Material Difference", which is a very good tagline for a company that makes construction material.

The group is vertically integrated — it owns the chain from the quarry through to the finished product — across three markets: Great Britain, Ireland and the United States. It holds 1.7 billion tonnes of mineral reserves and resources, runs two cement plants, and employs around 4,900 people. It sits in the FTSE 250.

Around 19% of the shareholding is held by Abicad Holding Limited, based in Cyprus, and a person within Abicad is the non-executive chair of Breedon Group. The owners have a very significant shareholding and therefore potentially a lot of control. The chairman has a lot of control over the direction of the company and will be able to exert pressure on where it goes.

The chairman is Amit Bhatia. In January 2013 he founded Hope Construction Materials, formed out of the divestments required of Tarmac Group and Lafarge when those two very large materials companies merged. Hope's assets included the largest cement works in the United Kingdom at Hope in Derbyshire, around 170 ready-mixed concrete plants, rail heads and quarries, and around 900 employees. In August 2016 he sold Hope to Breedon Aggregates for £336m and joined the board of the newly formed Breedon Group as a non-executive director, becoming deputy chairman in 2018 and non-executive chairman in 2019. He is also a founding partner of Summix Capital, a strategic land and property investment firm operating in the United Kingdom and Ireland, and is the son-in-law of Lakshmi Mittal. He is in his mid-forties.

Looking at the chairman's and the significant shareholders' track record, this is a company builder — either looking to sell Breedon to another company, or merge it with something else, or acquire other assets on the cheap. I very much think it will be in his nature to keep building.

Great Britain, and almost nothing else. Great Britain is around two-thirds of both revenue and profit. The United States — for all the growth — is 18.3% of revenue and only 14.6% of divisional underlying earnings, because its margin is the lowest of the three at 13.5%. Ireland is the most profitable platform by margin at 22.0%, but it is also the smallest at 16.9% of revenue.

So while the company is seeing great revenue growth on the United States side, it doesn't take up a huge proportion of the underlying profitability of the group. A recovery in Great Britain is worth far more to Breedon than anything the American platform can deliver in the near term.

Revenue and underlying profit by location — FY 2025

Great Britain accounts for 64.7% of divisional revenue and 63.4% of divisional underlying EBITDA. Source: Breedon annual results 2025, segmental analysis. With effect from 1 July 2025 the group moved from a divisional structure to a country-based one.

The last few years have seen revenue growth. In 2022 revenue rose 13.3%, then 6.5% in 2023, 6.0% in 2024 and 8.7% in 2025. That's quite surprising given the state of the market at this point in time, although those figures aren't through the roof.

The important qualifier is that the recent growth is bought rather than earned. On a like-for-like basis, revenue fell 3% in 2025 and fell 5% in 2024. The headline growth in both years came from the United States acquisitions.

Gross margins have slipped a little in recent years, from a high in 2022 of 82.4%, to 82.3% in 2023, 80.5% in 2024 and a further slip to 79.8% in 2025. These gross margins seem very good to me, but it's of concern that they keep slipping. On the underlying EBITDA basis the margin fell 80 basis points in 2025 to 16.3%, then a further 60 basis points in the first half of 2026 to 13.5%.

Earnings per share have been reducing from 2022 each year, year on year, through to 2025. Reported earnings per share have gone 33.2p, 31.0p, 28.0p and 24.2p — a fall of 27% from the 2022 peak. The adjusted figure has held up better but has also turned down, from 35.3p to 31.8p.

Some of this is dilution, although not much of it. Shares in issue have risen 2.3% over the period, from 338.9m in 2022 to 346.6m in 2025, mostly from shares issued as consideration for Lionmark and from share plan vesting. The rest is a decline in profitability.

Mergers and acquisitions are at the heart of the growth strategy. The record of the last three years:

Lionmark contributed £161.4m of revenue and £21.1m of underlying EBITDA in ten months of 2025, and the headline enterprise value represented around 7.7 times its 2024 adjusted earnings, which is not an expensive multiple. The three acquisitions completed in the first half of 2026 contributed £6.1m of revenue and £1.5m of underlying EBITDA in the period, and generated £22.8m of goodwill.

On where the next deals come from, the company doesn't name targets, but it does set out its priorities: the order of capital allocation is the United States first, then Ireland, then Great Britain, and it describes the pipeline as well populated. On the evidence of the last three years, that points to further bolt-on aggregates and surfacing businesses in Missouri and the wider Midwest, and reserve-led purchases around Dublin. The chairman's history suggests the appetite is unlikely to fade.

I'm a little concerned about the direction of net debt. It increased from £405.3m in 2024 to £527.3m in 2025, primarily driven by the Lionmark acquisition, and it stood at £690.5m at 30 June 2026 after Falling Springs and the seasonal working capital build.

Covenant leverage was better than expectations in 2025 at 1.8 times, and the company operates to a target range of up to 2.0 times. At the half-year mark it stood at 2.1 times, marginally below the 2.2 times of a year earlier, and the company expects further deleveraging across the second half on its cash generation.

I still feel that these acquisitions shouldn't be coming as debt onto the company's balance sheet. That's a bit of a negative.

Covenants and borrowing facilities

The borrowing facilities comprise a £400m multi-currency revolving credit facility — an agreed overdraft the company can draw on and repay as needed — extended after the period end by twelve months to July 2030, and around £363m of United States private placement loan notes with maturities running from 2028 to 2036 at an average coupon of around 3%. A new US$40m note was issued in the period at a fixed rate of around 6%, maturing 2033. Interest on the revolving facility was charged at margins of between 1.75% and 1.95% over the relevant reference rate.

The numerical covenant limits themselves aren't disclosed in the interim statement, so the exact headroom can't be measured from outside. On what is disclosed — interest cover near eight times, nothing to repay before 2028, and a facility the lenders have just extended — a breach doesn't look like the near-term risk. At 2.1 times the company is at the top of its own comfort range, which limits how much further debt-funded buying it can do without slowing the programme or issuing equity.

Revenue rose 8.7% in 2025 but underlying EBITDA rose only 3.3%, which means underlying costs before depreciation rose around 9.8% — faster than sales. There are four reasons.

• Acquisition mix. Lionmark brought asphalt and surfacing work into the group, which carries a structurally lower margin than aggregates and cement, so the same revenue now buys less profit. That alone accounts for much of the 80 basis point fall in the group margin.
• Volume deleverage in Great Britain. Like-for-like revenue fell 3% while the fixed cost base of quarries, plants and vehicles stayed where it was, so each tonne carried more overhead.
• Depreciation and amortisation from buying businesses. Depreciation and mineral depletion reached £113.2m, and amortisation of acquired intangible assets reached £25.3m within non-underlying items. This is why statutory profit fell so much further than underlying profit: operating profit dropped from £156m to £131m and pre-tax profit from £135m to £106m, on higher revenue.
• Wage inflation. The employee line rose to £297.2m, which the company has been fighting with over £20m of structural savings from procurement, distribution and headcount, plus a £6.0m gain on selling carbon allowances. Without those the picture would have been worse.

The first half of 2026 shows the same. Raw material costs actually fell, to £154.6m from £172.2m, but employee costs rose 10.4%, depreciation rose 11.6% and other operating expenses rose 11.5%, so total underlying costs rose 6.3% against revenue growth of 5.1%. Employee costs now exceed raw material costs, which tells you how much of this business is labour and plant rather than materials.

The interims came out on 29 July and continue the general story. Revenue increased 5% to £857.9m, and 3% on a like-for-like basis — the first like-for-like growth in a first half since 2023. Underlying EBITDA was flat at £115.5m.

But profit before tax slipped again, down to £26.7m from £34.9m in the first half of 2025. Reported earnings per share fell to 7.4p from 8.0p, and the adjusted figure to 9.4p from 11.2p. Return on invested capital — the profit generated per pound of capital employed in the business — fell to 7.0% from 7.8%.

Great Britain is significantly larger than elsewhere, at 66% of divisional underlying earnings. Within it, ready-mixed concrete volumes fell a further 8%, which put pressure on both pricing and margins, while aggregates and asphalt showed signs of stabilisation and benefited from major infrastructure project wins. Ireland grew revenue 12% but its margin fell 170 basis points because of an unscheduled shutdown of the cement mill at Kinnegad during May; the mill is back at full capacity and isn't expected to affect the second half. The United States grew revenue 20%, and 14% on a like-for-like underlying EBITDA basis, helped by better Midwest weather than a year earlier.

For context on 2025: in Great Britain, revenue fell 3% to £1,116.1m as the market saw a fourth consecutive year of volume declines, driven by subdued demand in housebuilding — ready-mixed concrete volumes were supplied at their lowest levels since 1963. In Ireland, revenue fell 2% to £291.6m on the deferral of two major infrastructure projects, although the underlying market stayed robust. In the United States, revenue rose 139% to £316.1m and underlying EBITDA rose 73% to £42.8m on the Lionmark acquisition and a full year of BMC.

In the 2025 outlook statement the company said the United Kingdom construction market continued to be subdued, although there were signs of the market stabilising, and that while changes to planning regulations are helpful, meaningful recovery in United Kingdom residential markets will only be seen if there is an appropriate demand stimulus put in place.

I fully agree with this, and I don't really anticipate significant enough demand stimulus to drive the United Kingdom construction market any time soon. I'm not hearing, in a general sense, the glimmers of either Help to Buy or a Help to Buy type of initiative, which I suspect is really what might be needed to bolster the residential markets — although government infrastructure spending is likely to improve in the coming years.

From the interim report, Great Britain construction market indicators remain subdued, suggesting demand will decline for a fifth consecutive year this year, driven by weakness in residential new build. In Ireland the outlook is positive: the National Development Plan has allocated funding for essential infrastructure investment over the coming decade and funds are starting to be deployed, though this is quite a small segment of the overall business. In the United States there's a healthy backlog of orders and supportive conditions for volume and price, even while residential demand for their products is softer, with data centre demand increasing in the Midwest.

Guidance is for full-year underlying EBITDA in line with market expectations, which the company puts at £280m against a range of £273m to £285m, with revenue phased 48:52 between the halves, depreciation of £125m to £130m, net interest of around £35m and a tax rate of 22% to 23%.

The yield is 4.7%, which is significant. But I have some concerns about the dividend payments coming up, and the figures support that concern more than I expected.

The interim dividend was raised 5% to 5.00p, and the company disclosed that this equates to a payout ratio of 53%, up from 42% a year earlier and above its own financial framework target of 40%. Full-year dividend cash cost is guided at £55m. On the earnings expectation set out below, post-tax profit for 2026 comes out at around £53.8m — so the dividend would cost slightly more than the company earns on a statutory basis this year.

Cover looks better against underlying earnings, but on either measure the payout is running ahead of the company's stated target while earnings fall. With earnings per share reductions, they may find it a little hard to justify a yield at 4.7%.

The gross margin basis in the source data changes between 2021 and 2022, so only the 2022 to 2025 figures are comparable with each other. NAV is net asset value — what the balance sheet says the business is worth after subtracting everything it owes.

On a historical basis the first half has been about 37.2% of full-year pre-tax profit. In lieu of better information I'm going to assume that for this year as well, which gives pre-tax profit of around £71.7m for 2026 and post-tax profit of £53.82m.

That's a significant jump down in post-tax profitability, from £83.9m in 2025 to £53.82m in 2026. Not very good figures, really. It amounts to an expectation of earnings per share of 15.5p.

I'm throwing in a growth rate of 1%, which given the earnings per share figures in recent times isn't exactly backed by historical record, but I'll go with it anyway. I'm applying a further valuation reduction of 10%, because I don't like where the earnings per share figures are heading, with a valuation multiple of 8 and a risk factor of 20%.

Valuation snapshot

Valuation inputs per tear sheet dated 5 August 2026. The tear sheet shows a P/E of 10.1×, which is calculated on adjusted FY2025 earnings per share of 31.8p; the 13.2× above is on the reported figure of 24.2p, for consistency with the reported-earnings basis used throughout. On the 15.50p estimate used in the valuation, the trailing multiple would be 20.7×.

The case against my own number

One point on the earnings assumption. The company's own guidance — underlying EBITDA of around £280m, depreciation of £125m to £130m and net interest of around £35m — implies statutory pre-tax profit nearer £90m once non-underlying items are deducted, which would put earnings per share closer to 20p and the valuation nearer 159p. The first half was depressed by the Kinnegad cement mill shutdown and by two loss-making winter months from Lionmark, and revenue is guided to phase 48:52 towards the second half. On the more generous figure the value opportunity would be around −50% rather than −62%, so the conclusion holds either way.

In many ways I quite like how this company is set up and how it was started. It's well run, the acquisitions have been bought at sensible multiples, and the American platform has been built quickly and competently.

But earnings are slipping because sales are slipping, and there isn't enough margin there either. The margins are also slipping. The company is ultimately suffering from a weak background market, and where their background market is the subdued Great Britain market, they're struggling to achieve the profitability they managed when the market was doing better. As with many other construction materials companies, they're struggling during tough times.

There's a bit of a case of if. If the background economy picks up and construction improves, then this company will probably be able to pick up both their volumes and their margins at the same time. Until that happens, until there's more of a glimmer of that kind of recovery in United Kingdom construction markets, they're going to struggle to push up their earnings per share.

Acquisitions in the United States are fine, but ultimately the American side is quite small in comparison to the British side of the business — 14.6% of divisional earnings against 63.4%. It can't carry the group on its own.

• My earnings assumption may be too harsh. I have taken the first half at 37.2% of full-year pre-tax profit on a historical basis. Company guidance implies something nearer 20p of earnings per share and a valuation around 159p. The gap between my 15.5p and that 20p is the single largest swing factor in this note.
• Second-half phasing is genuinely stronger. Revenue is guided 48:52 towards the second half, the Kinnegad mill is back at full capacity, and the first half carried two loss-making winter months from Lionmark that will not repeat in the same way.
• The chairman may act. This is a company builder with 19% of the register behind him. A sale of the group, or a merger, would likely be struck well above the valuation I have arrived at — and that is the classic way a cheap-looking short goes wrong.
• Infrastructure spending is turning. Ireland's National Development Plan money is starting to be deployed, United States order backlogs are healthy with Midwest data centre demand rising, and United Kingdom government infrastructure spending is likely to improve even without a residential stimulus.
• The balance sheet is not the risk. Interest cover near eight times, nothing to repay before 2028, and a facility the lenders have just extended. Anyone shorting this on a distress thesis is shorting the wrong thing.

• A meaningful demand stimulus for United Kingdom residential construction — a Help to Buy or something like it. That is the specific catalyst I am not hearing, and it is what the recovery case rests on.
• Like-for-like revenue growth in Great Britain sustained across two consecutive halves, rather than the group-level growth that acquisitions supply.
• A halt to the margin slide — underlying EBITDA margin holding or recovering rather than falling another 60 basis points.
• Full-year earnings per share landing nearer the 20p that guidance implies than the 15.5p I have assumed.
• Acquisitions funded from cash flow rather than added to net debt, with covenant leverage back inside the 2.0× target.