Kingspan buys UK subsidiary of rival warning of Brexit slowdown

Building insulation specialist Kingspan has agreed a £37.5m (€42m) aquisition in the UK despite Brexit uncertainty leading to a slowdown in that market.

The Cavan-based group is buying a business called Building Solutions from its UK counterpart SIG, which has announced a sale of non-core assets after warning of significantly lower profits due to a weakening economic outlook in the UK and Germany.

SIG will use the proceeds - along with nearly €223m from the separate sale of its air handling division to a French buyer - to pay down debt.

In August, Kingspan said it had around €600m to spend on acquisitions and was hoping to boost its North American and continental European businesses to stave off UK and German weaknesses itself.

Speaking in August, after the publication of a strong set of first half financial results, Kingspan chief executive Gene Murtagh said the group's acquisition pipeline was very healthy and that progress on specific takeover targets was likely before the end of the year.

SIG's share price plummeted by as much as 26% after it said it now expects much lower underlying profitability compared to previous expectations in both its specialist distribution and roofing merchant businesses.

The British insulation group's latest trading update highlighted “a number of key indicators pointing to further weakening of the macroeconomic backdrop, notably in the UK and in Germany.”

British construction has slumped, weighed down by uncertainty over Britain’s departure from the EU, while the German economy has been slipping towards recession even as construction remains buoyant.

SIG’s warning sent ripples through the Ftse Construction and Materials sector, with shares of bigger rivals Travis Perkins, Howden Joinery Group and B&Q-owner Kingfisher all lower.

In Dublin, Kingspan - up by around 12% over the past 12 months - was also marginally down.

“This deterioration in trading conditions has accelerated over recent weeks, and political and macro-economic uncertainty has continued to increase,” SIG said as it entered its “traditionally strongest” trading months of the year.

Berenberg analyst Lushanthan Mahendrarajah said: “There’s also this factor about how much of your weighting in your profit is geared into September to November time, just when Brexit negotiations are heating up, which means uncertainty is at a peak.”

“Any company that has a big chunk of their profit coming in September and October, there’s more of a risk of not hitting their full-year expectations.” he said.

Shore Capital analyst Graeme Kyle said the warning reflected “political turmoil impacting construction project decisions in the UK”.

Peel Hunt analysts have cut their pre-tax profit estimates for SIG by 15% to £68m (€76.2m) for 2019.

SIG, which supplies insulation, energy management and roofing products, said it was taking actions to address the continuing market weakness, but did not divulge specific details.

Kingspan has lowered its UK dependency over the past decade - with its operations there accounting for 25% of revenues as opposed to 75% previously.

While uncertainty has hit regular customers, the group said Brexit-agnostic areas like tech and data centres have cushioned the UK slowdown.

The Building Solutions deal is being viewed as a bolt-on buy, rather than a headline transaction - with it expected to add just 1% to Kingspan's revenues over a full year and less than 1% to its operating profits.

Mr Murtagh said, in August, that Kingspan was not contemplating a catastrophic Brexit outcome but will be as "agile" as it needs to be in order to cope with the final result.

-additional reporting Reuters