Even in sectors deemed cyclical or difficult, we always find “outsiders” who surprise with the quality of their management and the performance of their results. The Swiss construction materials specialist has long been one of them.
Sika once again reaches a record turnover in 2024, despite a trying economic situation which has not spared it: organic growth is thus anemic, even a bit negative at the real exchange rate; while sales growth in the EMEA and Asia-Pacific regions shows a very clear decline compared to 2023.
Sika’s recipe for success lies in its mastery of making profitable acquisitions with mastery. Over the past twelve months, Kwik Bond, an American manufacturer of polymer systems for bridge rehabilitation, has been integrated into its scope; as well as concrete mixers Vinaldom in the Dominican Republic and Chema in Peru, each with its specialty product offering.
With controlled use of leverage, Sika’s return on equity — which frequently exceeds 20% — far outperforms all of its peers, for example Saint-Gobain, CRH or Vulcan. Over the last decade, the capital invested by the Swiss in its external growth has produced double-digit returns on investments.
All this is well known – including the Bill & Melinda Gates Foundation, which holds 8% of the capital – and is likely to last, since the construction materials sector remains very fragmented. After the mega-acquisition of MBCC last year, and the three smaller transactions this year, Sika claims to control 11% of the market share; there is therefore still ground to be captured.
However, growth will be less sustained over the next five years than it has been over the last five. The group intends to compensate for this slowdown – mass effect requires – by expanding margins; it also promises a “disproportionate” increase in its operating profit before investments from next year.
-Will the message be well understood by investors, whose expectations have always been very high? In any case, they seem to have returned to a more wait-and-see attitude in recent quarters. Sika, which on a current basis should generate 2.4 billion Swiss francs in EBITDA next year, supports an enterprise value of forty billion.
This multiple of x17 operating profit before investments is closer to the historical valuation floors of x14 EBITDA, affected for example at the very beginning of the pandemic, than to the historical average of x23 EBITDA, biased it is true by the speculative distortions observed the following year.
The fact remains that with 40% of its outlets in emerging markets, a strong foothold in North America and a very clever mixed positioning of cement and specialty products – such as adhesives and insulation – which allows it to offer project owners of “all-in-one” solutions, the Swiss can look forward to the next cycle with confidence.
As such, further compression of valuation multiples would undoubtedly represent an opportunity to be exploited.
