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BPB: Full year results
Driven by a strong performance in North America and emerging markets, BPB reported a 6.7% growth in turnover and a 29% growth in underlying pre-tax profits. Underlying operating profits grew 24% to £308.1m.
A strong housing market in North America enabled BPB to increase wallboard selling prices significantly driving profits up 78% to £71.4m in the region. Strong demand in South Africa and Asia helped produce similar results for emerging markets where profits rose by 26% to £19m. A more sedate 12% profit growth was seen in Europe, the company’s largest market, sustained by volume growth in the British Isles, Spain and Eastern Europe.
While there is no doubt that the company has performed well, it is highly dependent on the state of the housing market. This year’s growth has been driven in markets where the housing boom is still continuing-North America, South Africa, Asia, Eastern Europe and Spain. We are bearish on the prospects of the housing market and BPB’s growth rate should be moderate in the medium term.
BPB has already seen significant cost increases in energy and freight, due to higher oil and natural gas prices. So far, strong markets have enabled the company to pass on the cost increases to customers but this will not happen when markets start to slow. The medium term outlook for oil prices is still strong and this is likely to bring operating margins under pressure.
BPB has been experiencing increasing costs in a number of other commodities including, steel, expanded polystyrene beads and US paperboard liner. The outlook for these is less certain but, short of a sharp slowdown in China, prices are unlikely to weaken.
The company is aware of these problems and is focusing on continuous cost reduction by improving operating efficiencies. The company is gaining some good practise in implementing efficiency improvements in the slow market of North and Western Europe but whether they can deliver much faster growth than currently being experienced in Northern and Western Europe (where BPB’s turnover was flat and profits grew just 3%) remains to be seen.
The share trades at 475p, on a prospective PE of 12.4x (on 2005 earnings)which is at the upper end of the sector and similar to Balfour Beatty. The wide geographical spread of the company’s business suggests greater sustainability of earnings (than for example a UK focused company) but BPB does not have either the scale of Balfour Beatty or the depth of its order book to justify this multiple. The yield is 3.25%
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