Kingspan has €500m headroom for deals, Davy says

Insulation group Kingspan, which has taken a pause this year on the mergers and acquisitions front, has the capacity to spend at least €500 million on deals, according to analysts at Davy.

In a note to clients in which they raise their price target for Kingspan's stock to €37.50 from €32.50, Davy analysts Flor O'Donoghue and Michael Mitchell said the figure for M&A headroom is based on the Cavan-based company's own limit of having a maximum net debt figure of two times operating profits.

“Since April 2016, Kingspan has undertaken six acquisitions for an aggregate consideration of €262 million. However, all of these were in 2016; Kingspan has yet to open the cheque book this year,” the analysts said. “This is not due to a lack of appetite, a change in strategy or any financing constraints.”

Kingspan had warned last month that its margins will be squeezed in the first half of the year before it fully recovered rising MDI costs from its customers

Kingspan's chief executive, Gene Murtagh, said last month on the fringes of the company's annual general meeting that while the company has never had as "positive" a pipeline of potential deals, price expectations among would-be sellers of assets have never been higher.

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While Davy’s new price target for Kingspan’s stock suggests 20 per cent upside for investors, the shares fell on Wednesday as the market continued to worry about the impact of the rising cost of a key chemical ingredient for insulation panels, methylene diphenyl disocyante (MDI). Kingspan had warned last month that its margins will be squeezed in the first half of the year before it fully recovered rising MDI costs from its customers.

Belgian peer Recticel warned last week that MDI shortages in Europe has forced it to cut its insulation production.

“Kingspan, which spends circa €350 million to €400 million per annum on MDI, is not immune to such pressures, although we believe the group is clearly in a far stronger position than its competitors for a number of reasons,” the Davy analysts said. “These include factors such as its enlarged scale and deeper supply base, while Kingspan can also offer customers alternative products such as Kooltherm and fibre core insulation panels.”

Davy estimates that Kingspan will execute a 5 per cent increase in insulation selling prices this year, the equivalent of €150 million, which is “far above what it has pushed through in recent years”.