Earnings upgrades have the potential to drive forward new market entrant Polypipe (PLP) as one of Europe’s largest manufacturers of plastic piping systems benefits from an improving construction end market.

Founded in 1980, the £528 million cap boasts the most comprehensive range of products available in the UK and produces over 20,000 lines which are used in the residential, commercial and infrastructure sectors. A focus on the entire life-cycle of its product - from design and manufacture through to delivery and technical support - is a key competitive advantage and means the firm has a lot in common with other high-quality building suppliers such as Marshalls (MSLH) and Howden Joinery (HWDN).

Pricing power

The ability to value-engineer products to suit end-user requirements and provide the supply chain (merchants) with value-added sales is likely to be one of the key attractions of Polypipe going forward, which joined the Main Market last month when stock was issued at 245p (16 Apr). The firm’s strong competitive positioning was demonstrated during the 2010 to 2014 period when it was able to ‘to pass on raw materials pricing’, comments Howard Seymour at Numis. This helped ensure rising revenues despite ‘unparalleled volatility’ in the firm’s input costs and ‘led to Ebit outperformance against our peer group - with the exception of Howden Joinery’.

Of course while past performance is no indication of future profitability, one can see that the firm’s scope for organic expansion is likely to be informed by a move away from more traditional products like copper, clay and concrete. As the use of copper piping in plumbing and heating further declines and environmental concerns and their attendant regulatory ambits continue to impact the plastic piping segment, the Doncaster-headquartered market leader is better positioned than most to take advantage of the unfolding opportunity. According to Numis, the firm can demonstrate that development products have risen from 17% of group revenues in 2007 to 28% in 2013 and therefore are a major driver of revenue.

Of course, Polypipe’s potential to outperform the wider construction backdrop means that, in an industry flush with upbeat growth forecasts out to 2017 at least, the group’s capacity to surprise to the upside should not be underestimated. This is particularly significant in the residential Repair, Maintenance & Improvement (RM&I) market where spend per dwelling is 35% below peak 2002 levels in real terms. Based on Numis’ forecast for 14.8p of earnings per share (EPS) for the year ending December 2014, the company does not appear cheap, trading on a forecast price/earnings ratio of 17.7, however the potential for earnings upgrades could quickly change perceptions here.

Growth potential

Numis comments that the ‘volume recovery in the group’s major markets will add a dimension to growth’, and to that end the broker has a set a target price of 300p. Meanwhile, those seeking reassurance on what rating a quality construction company should enjoy will note Howden trades on a 17 times consensus forecasts for 19.0p of EPS to December 2014, given the current share price of 324p. Polypipe also promises strong earnings growth which should justify the premium rating with Numis calling for EPS of 18.7p in 2015, a 26.4% advance on this year’s anticipated turnout.

Polypipe (PLP) 262.0p

Stop loss: 209.6p

Market value: £528 million

Prospective PE Dec 2014: 17.7

Prospective PE Dec 2015: 14.0

1-month relative strength: -2.7%

1-year relative strength: -

Prospective dividend yield: 1.7%

Bid/offer spread: 0.57%

Growth: HIGH

As an innovative market leader in a recovering sector there is plenty of scope for earnings upgrades.

Risk: MEDIUM

While construction is at an inflection point, unforeseen volatility in the housing market remains a concern.

Quality: HIGH

Strong management and a sharp eye on product development maintain Polypipe’s UK market-leading position.