High sales to the UK, check. Exposure to construction, check. High-ish debt, check. These facets of Polypipe’s business appear chosen to brew the perfect Brexit short sale target. Yet the maker of plastic piping systems should not suffer from the EU referendum result. Tuesday’s half-year results were met by a small pop in the shares, returning them to pre-vote levels, after a 25 per cent fall in the aftermath.
Some of this stems from good recent trading performance. Revenues grew organically at 8 per cent (helped by two extra working days in the half). The acquisition of Nuaire, a provider of ventilation kit, promises synergies on the sales side; the same environmental rules that drive demand for Polypipe’s pipes affect ventilation, and customers prefer one provider to two. The Nuaire purchase is why net debt to earnings before interest, tax, depreciation and amortisation hit 2.5 last year, but that is already down to 2.3, with a target of 2.0 by December.
Polypipe enjoys some idiosyncratic protection from a Brexit-induced construction slowdown. Less than a quarter of sales are related to new build, and repair and maintenance (which is slightly larger) should not be affected by Brexit-fright. Those environmental rules drive upgrades less vulnerable to the cycle. Polypipe’s range of 20,000 parts are built to UK specifications, which (like Britain’s three-pin electric plugs) don’t match EU standards, so the threatened loss of single market access amounts to little.
The recovery casts light on a too-indiscriminate reaction against construction. Unlike in 2008, ongoing projects are not being cancelled. Lower land prices only hit those with land banks, not the providers of building materials. The government, realising how hard it is to fire up an export-based recovery, is making encouraging noises about house building and infrastructure. Polypipe is trading at less than 13 times estimated earnings for 2016, according to Deutsche. Not bad value for a growing business.
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