Last October, Gene Murtagh, chief executive of Kingspan, the construction products company based in Cavan, hosted a capital markets day at the company’s Light + Air manufacturing facility near Lyons, France.
Top of the agenda, as he talked to his audience of analysts and investors, was the topic of growth.
There were, Murtagh said, two scenarios in front of the company. The first was the so-called “boring scenario”, by which Kingspan would grow organically by 5 per cent per year to a potential annual revenue of more than €12 billion by 2030, compared to its current annual income of about €8 billion.
Then, he said, there was the “not-so-boring scenario”, by which the company could potentially grow at a rate of 10 per cent per year, through organic growth and significant acquisitions, to closer to €19 billion a year.
At the core of that scenario was evidently the prospect of significantly expanding in the Americas in a big way through strategic acquisitions of target companies involved in the roofing market.
By the time he gave his speech, the world was already aware of Kingspan’s discussions with Carlisle, an Arizona-based construction materials company with a market cap of nearly $13 billion (€11.9 billion).
Together, it would have made for a mega-merger, given that Kingspan itself has a market cap of just around €13 billion.
Ultimately, the talks didn’t go any further, but it’s clear that Kingpsan has in no way backed off the acquisition trail.
In the past year it put up €230 million for the remaining shares in Swedish company Nordic Waterproofing, €250 million for German company Steico, completed the acquisition of Danish business Troldtekt, and got regulatory clearance in New Zealand for a local manufacturer called Conqueror New Zealand Ltd.
While the Carlisle deal would have been of a substantially greater scale, it is likely that Murtagh will continue to push Kingspan’s M&A strategy as one of its key levers of growth through 2024.
However, as well as pulling off big deals, it is likely that Murtagh and Kingspan will have some significant challenges to deal with in 2024.
The first of those is the apparent slowdown in some of its key markets, which the company itself signalled in August when it was issuing its financial results for the first six months of 2023.
In that period, its revenues fell very slightly from €4.15 billion to just over €4.08 billion, while its trading profit rose from €434.2 million to €435.5 million.
In a statement announcing the results, the company declared them “relatively pleasing ... given the somewhat challenging environment we were confronted with”.
The company noted in a statement that, similar to 2022, “conditions varied considerably by market and by end segment”, with the Americas performing “exceptionally well” thanks to its insulated panels division.
However, Europe had “predominantly weaker new-build activity [with] refurbishment suffering somewhat due to the current interest rate environment”.
Three months later, the company told markets in its third-quarter results that its sales had risen to €6.14 billion, which was again slightly down on the figure from the previous year.
But, Kingspan said, going into the final quarter of the year it expected that it would buck the general market conditions and was likely to record a trading profit for the full year of about €875 million, which would generate enough free cash to reduce its net debt by a third to about €1 billion.
For several big investment banks, the results made for positive reading in spite of the wider unpredictability in the market.
For example, Bank of United States Merrill Lynch, in a report issued in November, noted the company’s full-year profit guidance had been raised marginally, as well as the reduction in debt from free cash flow, and rated the company a buy, with what it characterised as “attractive medium-term growth potential [as well as being] well positioned to navigate an uncertain market environment”.
BNP Paribas Exane, the French bank, praised Kingspan for the “underappreciated resilience in [its] volumes” and noted that with “more favourable price-cost dynamics, a long shopping list of value-accretive M&A opportunities, and a pipeline of innovative products and solutions ... it becomes hard to argue that the group won’t outperform”.
Goldman Sachs was similarly bullish, saying that it had a buy rating on the company, and expected it to exceed its estimates for the full year, noting that Kingspan was “a key beneficiary of several regulatory tailwinds [in the] short to medium term”.
[ Regulators approve Kingspan deal in New ZealandOpens in new window ]
Not every analyst agreed, however. JP Morgan, for example, downgraded its rating of Kingspan in September from an “overweight” rating – meaning the analysts believe it will increase in value over time – to neutral.
It said that Kingspan has been “one of the strongest performers within our sector, with the performance aided by the unscheduled positive update in July”, but that its decision to downgrade was based on “the strong year-to-date performance with the catalysts largely played out”.
Most of that was due to the slowdown in Europe, it said, given that the company remained “very strong” in US and “good” in France, but that there was weakness in central and eastern Europe, while the UK market had weakened in both residential and non-residential markets.
The bank said that it “[continues] to see limited scope for meaningful upgrades” and that it “highlighted risks of disappointment compared to the performance seen across other names within the sector”.
While various analysts differed on Kingspan’s full-year results for 2023, or on its ability to navigate the expected choppiness of the construction products sector in 2024, most agreed that for the coming years the company was likely to continue its aggressive acquisition spree.
Numis, a London-based stockbroking firm, has in one report said that that the most likely route for Kingspan in the coming years was a combination of organic growth and targeted acquisitions in the US and Latin America, where the company has already made a number of significant purchases.
In the report, published after the company’s capital markets day in France, it noted: “We think the acquisitive roll-up of the European and US insulated panels markets has now largely played out, and the focus is increasingly on roofing markets.”
Numis’s report identified, in particular, the key growth sectors in North America such as data centres, assembly and battery plants, ecommerce warehouses, and chip fabrication plants, which are likely to be the source of a big flurry of construction projects in the coming years.
While the deals are likely to see Kingspan buying small but strategic players and trying to consolidate the market, in light of the Carlisle discussions Numis’s analysts asked: “Could something more transformational be around the corner?”
JP Morgan did sound one bearish note on the acquisition spree, however, writing in its report that such deals “will be quite topical particularly given the headlines on Kingspan looking to acquire Carlisle, which could stress the balance sheet given the size of the deal”.
That’s not the only concern on the horizon for Kingspan, with the likely publication in June of the report of the inquiry into the Grenfell Tower fire in London in 2017, in which 72 people died.
Kingspan has always stated that it was not aware of the use of its products on the Grenfell Tower, and noted the inquiry’s finding that its K5 product only made up 5 per cent of the insulation on the tower – and that this was not sufficient to have had a material impact on the speed or spread of the fire.
Nonetheless, the inquiry has become a source of some reputational damage for the company, with months of serious revelations about the company’s culture in the years leading up to the fire, and its interaction with regulators and oversight bodies in the UK.
In December 2021, the company had to drop a proposed sponsorship agreement with the Mercedes Formula One team over the controversy, and Michael Gove, the British housing minister, has been stridently critical of the company in the House of Commons.
In Ireland, Ulster Rugby, where Kingspan sponsors both the team’s shirt and the stadium, have been pressured to drop their sponsorship relationship with the company.
The inquiry, according to a recent update on its website, has said that it will publish its report in June, which would coincide with the seventh anniversary of the tragedy. It remains to be seen just what the report will conclude, but any further negative commentary could be damaging to the Kingspan brand.
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