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A growing FTSE 250 stock with upside potential

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FTSE 250 stock and plastic pipe manufacturer Polypipe Group (LSE:PLP) is on the acquisition trail. The £1.4bn company is snapping up businesses that complement its offerings and is strengthening its grip as a leading supplier.

In its last annual report, the Polypipe Chair said 2019 market conditions had been tough (sales were down) but Polypipe was making progress and it planned to focus on growing M&A in 2020. Unfortunately, the pandemic struck and times were tough for a while. But it began steering a recovery and has continued to make acquisitions.

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Strengthening this FTSE 250 stock

Last month Polypipe acquired London Topco Limited (known as ADEY) for £210m. ADEY is a sector leader in providing magnetic filters and chemicals that improve energy efficiency in water-based heating systems for the residential market. It’s a company with a good record of growth and profitability. This acquisition is a great fit for Polypipe’s existing offerings and will help grow its target market. Polypipe’s customers include housing developers, plumbing, and heating installers and specialist distributors.

The focus on improving energy efficiency is also highly appropriate for now when environmental regulations are tightening. By next year, it’s expected that filter installations in every new-build heating system will be compulsory. That’s because they can reduce carbon emissions by 7%.

Polypipe paid for ADEY through a mixture of debt and an equity placing. However, diluting Polypipe shares and drawing down debt, takes the shine off the initial upside gain from this acquisition.

Acquiring Nu-Heat Holdings

Prior to the ADEY acquisition, Polypipe acquired heating systems supplier Nu-Heat Holdings for £27m on a cash-free, debt-free basis. This is another company that fits well with the FTSE 250 group’s strategy and complements its brands. Like ADEY, Nu-Heat also has a history of growth, profitability and good cash flow generation.

Martin Payne, Polypipe CEO said the buy would help it develop new ways to integrate underfloor heating, heat pumps, and air-based climate management systems.

Cautious optimism

In a recent trading update, the board said it expects underlying operating profit to come in around £40m. This is a slight improvement on previous expectations. But it’s a lot less than 2019, when underlying operating profit rose to £78.1m.

The company has begun 2021 with a strong order book though and the Polypipe share price is up 12% in a year.

The FTSE 250 stock currently has a price-to-earnings ratio of 23 and earnings per share are 25p. The company cancelled its interim dividend but hopes remain for a full-year dividend.

With the country getting vaccinated and gradually emerging from this latest lockdown, optimism prevails. However, worries of further Covid-19 case surges and potential mutant strains urge caution.

Emergency boiler repairs have kept plumbers busy over the winter months, and that should have helped Polypipe maintain a level of business as usual. But risks posed to the business include inflation and post-Brexit after-effects. Inflation could cause raw material prices to increase. There are already signs of this happening throughout the construction industry. And it’s possible Brexit has disrupted Polypipe’s supply chain or increased product costs. Either of these scenarios would impact revenues.

If I owned Polypipe shares, I’d continue to hold. Whether I consider buying will depend on its 2020 full-year results and future outlook, at today’s price it’s not a cheap stock. Polypipe’s final results for FY20 are due next week. I’ll be watching.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Polypipe. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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