Polypipe Group. Strong Residential performance. Sector themes maintained, some portfolio tweaks. French disposal modestly dilutive to earnings

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1 Polypipe Group Strong Residential performance FY17 results Construction and materials Newbuild residential was the standout sector for Polypipe in FY17 with relatively subdued performance in Commercial and Infrastructure. Overall, underlying PBT and EPS from ongoing operations rose by 7.9% and 10.1% with full year DPS up by 9.9%. Our estimates are slightly lower adjusted for a non-core business disposal but recent share price weakness is overdone in our view. 20 April 2018 Price 388.6p Market cap 777m / 1.14 Net debt ( m) at end December Shares in issue 200.0m Revenue PBT* EPS* DPS P/E Yield Year end ( m) ( m) (p) (p) (x) (%) 12/16** / /18e /19e Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **2016 Continuing operations only Free float 93% Code PLP Primary exchange LSE Secondary exchange N/A Share price performance Sector themes maintained, some portfolio tweaks On a comparable basis (including the now discontinued French business), FY17 PBT was very slightly below our estimate but this was more than compensated for at the EPS level by a 100bp lower tax charge (from patent box relief). The profit mix was more skewed towards Residential (61% of ongoing EBIT in the year) driven by a newbuild market described as buoyant. In Commercial and Infrastructure, good export growth outside the Middle East supplemented low single-digit UK revenue growth. The proposed non-core French disposal and withdrawal from Middle East manufacturing are logical moves, in our view. Good underlying cash flow resulted in a further net debt reduction even with some short-term working capital investment. French disposal modestly dilutive to earnings There are some mixed market messages but Polypipe is well positioned in sectors expected to perform relatively well. Together with targeted share gains and price increases, the company started FY18 in reasonably good order. Our estimates have been rebalanced towards the Residential division and after adjusting for the French disposal improving the ongoing group EBIT margin PBT is modestly lower. We expect to see ongoing strong cash-generative credentials and underlying net debt reduction, which provides management with flexibility to both grow dividends and consider any suitable acquisition opportunities that arise. Valuation: Relative attractions General sentiment in UK building materials was weak during the reporting season. After an initial c 10% mark down of Polypipe s share price following the FY17 results, it has since substantially recovered towards the pre-results level. On our revised estimates, the current year P/E of 13.4x and EV/EBITDA of 9.6x trend down to 12.5x and 8.4x respectively by FY20. Although the market sectors served are not universally positive in outlook, a bias towards the robust new housebuilding sector, a reasonable expectation of increasing activity in highways and infrastructure work and low financial risk suggest to us that Polypipe can perform well relative to the wider market. % 1m 3m 12m Abs (2.2) (3.3) (1.9) Rel (local) (5.7) 1.4 (5.0) 52-week high/low 436.5p 348.0p Business description Polypipe is a leading European supplier of plastic building products and ventilation systems. Operations are substantially UK based and address a broad range of sectors including residential, commercial and civil building demand and a number of subsectors within them. There is also a small specialist pressure pipe and fittings business (Effast) located in Italy. Next events Capital markets event AGM FY17 final DPS 7.5p paid Analyst 9 May 23 May 25 May Toby Thorrington +44 (0) industrials@edisongroup.com Edison profile page Polypipe Group is a research client of Edison Investment Research Limited

2 FY17 results overview The benefits of balanced market exposure came through in FY17 with an excellent Residential performance more than offsetting less settled conditions in Commercial and Infrastructure. An exit from non-core French operations and Middle East manufacturing simplifies the group structure and the former move enhances what is already a positive cashflow outlook. Exhibit 1: Polypipe divisional splits Dec y/e m H1* H2* 2017 % ch yoy % ch yoy Original Restated H117* FY17 Group revenue % 6.3% Residential % 10.2% Commercial and Infrastructure % 2.8% Inter company Group op. profit company underlying % 6.0% Residential % 13.3% Commercial & Infrastructure % -3.7% Source: Company, *Edison Investment Research estimates. Note: French operations excluded from all columns save for the originally reported FY16 numbers, which are included for comparative purposes. Residential Manufacturer of plastic pipe systems, fittings and ancillary items (connectors, couplings, inspection chambers) and ventilation products (mechanical extraction, ducting) for residential housing. Revenue growth exceeded 10% in FY17, over half of this was attributable to volume (+6.6% y-o-y). Just over half of revenues are generated from the newbuild segment and, given that the secondary repair, maintain, improve (RMI) market was flat at best, the underlying momentum in newbuild was clearly very strong. While London demand was less busy than the prior year, other south-east and regional markets were more buoyant. Selling price increases in February also contributed to topline progress, although we believe that there was a relatively small under recovery of input price rises over the year as a whole. Nevertheless, on a net revenue basis (ie excluding inter divisional transfers), this division achieved a 19.8% EBIT margin, up 60bp versus FY16, which we attribute to good operating cost control. Commercial and Infrastructure Design and manufacture of internal and external thermoplastic drainage and water management systems, internal pressurised systems and ventilation solutions. Civil/infrastructure focuses on drainage and water management (especially roads/highways). Net revenue growth for the ongoing operations was 2.0% in the year; we suspect that divisional volume was lower y-o-y and, as above, higher selling prices contributed to overall growth. Regionally, UK revenue rose by 4.1% although we believe the rate of growth slowed as the year progressed with delays in road programmes and a slow down in commercial project awards both cited as reasons for this. Around 20% of divisional revenue by destination was generated outside the UK (with c 19m in Europe and c 27m elsewhere). European revenue rose by c 10% with improving demand possibly reflecting benefits from sustained sterling weakness relative to the euro. RoW revenue declined by c 15% against healthy prior year comparators in the Middle East, where order intake has reduced. Along with the political marginalisation of Qatar, this has understandably caused Polypipe to exit from direct manufacturing in the region; exceptional costs were taken in FY17 and equipment is to be relocated to the UK. (French operations have been treated as discontinued and excluded from the above figures ahead of an expected disposal during FY18.) At the EBIT level, this division recorded a 15.0% net margin, down 90bp y-o-y with mixed market conditions and some higher input price recovery lag contributing to this outcome. Polypipe Group 20 April

3 Positive cashflow performance, net debt trending down Polypipe ended FY17 with 148m net debt, a 16m y-o-y reduction and equivalent to 1.7x total EBITDA. For continuing operations, FY17 EBITDA rose in line with the EBIT increase shown in Exhibit 1 to 88.3m (versus 84.5m in the prior year). There was also a marked increase in working capital investment of c 10m in contrast to modestly positive cash flow contributions at previous year ends. Partly reflecting rising input costs and also ahead of announced price increases, c 9m of inventory build occurred in the year in the expectation that there would be a substantial unwind of the finished goods component early in the new financial year. (A similar and slightly earlier pattern was also visible at the end of FY16, where the inventory build was lower but trade receivables expanded as the demand pull-forward began before the year end.) This action allows Polypipe to maintain service levels during the busy ramp-up of site activity at the beginning of the year. Of the other cash flow items, we note that net interest was on a downward trend (partly following absolute debt levels but also ratcheted down interest costs) and capex ran at 1.5x ongoing depreciation (including investment in new larger diameter pipes for Civils at Horncastle). Note that discontinued operations contributed 1.3m net to group cash flow. Cash flow outlook: our updated estimates include free cash flow (FCF) at or above 50m in each of our forecast years after modest working capital absorption to facilitate growth and capex of at least 1.2x depreciation. Rising dividend cash payments absorb around half of the FCF generated; there is no defined benefit pension scheme requiring cash contributions, although significant planned or actual M&A activity could influence the rate of near-term dividend growth in our view. Our model includes the receipt of 14.5m ( 16.5m) from the French business disposal factored into FY18, contributing to a 110m expected end 2018 net debt. This represents 1.2x continuing EBITDA and with P&L bank interest cover of c 13x (16x on a cash basis) we believe Polypipe remains conservatively financed. In the context of a 290m RCF (reducing to 270m at the end of its term in August 2020), Polypipe has plenty of headroom for bolt-on acquisitions in our view. M&A appears to be under active consideration, though we do not assume such activity in our estimates. Estimate changes: Mixed market conditions predicted For market context, projections by the Construction Projects Association include continuing growth in residential newbuild activity and healthy (and accelerating) infrastructure spending. Polypipe s primary exposure in the latter subsector is in highways and stormwater management. Less favourably, RMI spending is expected to remain very subdued across both public and private sectors and commercial newbuild activity is predicted by the CPA to be significantly lower in the next couple of years. The primary change to our headline profit estimates in Exhibit 2 is the adjustment for the expected French business disposal. This equates to a 1.5m EBIT reduction in both FY18 and FY19, slightly softened at the PBT level by the interest impact of disposal proceeds (assumed to be received mid 2018). For ongoing operations, the EBIT mix is now more in favour of Residential, having lowered underlying group EBIT estimates slightly due to lower Commercial & Infrastructure expectations. Lastly, based on the FY17 outturn, we now assume a flat 18% effective tax rate in all years, which is a 100bp reduction to our previous FY18 estimate. We introduce FY20 estimates for the first time. Exhibit 2: Polypipe revised estimates EPS, fully diluted, normalised (p) PBT, normalised ( m) EBITDA ( m) Old New % chg. Old New % chg. Old New % chg e e e N/A 31.1 N/A N/A 75.9 N/A N/A 98.7 N/A Source: Edison Investment Research. Note: 2017 Old = estimate (including French operations), New = actual (excluding French operations) Polypipe Group 20 April

4 Exhibit 3: Financial summary 'ms * 2017* 2018e 2019e 2020e December IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue Cost of Sales (202.4) (210.0) (256.8) (219.1) (236.0) (251.1) (256.1) (261.9) Gross Profit EBITDA Operating Profit (underlying) SBP (1.0) (1.0) (0.8) (0.8) (0.8) (0.8) Operating Profit (reported) Net Interest (7.7) (5.3) (6.6) (6.6) (5.8) (5.8) (5.5) (5.3) Other finance (1.0) (0.9) (1.0) (1.0) (1.1) (1.1) (1.1) (1.1) Intangible Amortisation 0.0 (3.0) (6.8) (6.8) (5.5) (5.5) (5.5) (5.5) Exceptionals (20.7) (3.5) (0.6) (0.6) (4.6) Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax (5.4) (9.2) (11.8) (10.1) (11.8) (12.6) (13.2) (13.7) Profit After Tax (norm) Profit After Tax (FRS 3) Average Number of Shares Outstanding (m) EPS - normalised (p) EPS - FRS 3 (p) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (underlying) (%) BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Current Liabilities (69.8) (87.2) (104.5) (108.8) (99.2) (99.4) (99.6) Creditors (69.8) (87.2) (104.5) (108.8) (99.2) (99.4) (99.6) Short term borrowings Long Term Liabilities (120.6) (227.9) (200.2) (192.0) (193.0) (194.0) (195.0) Long term borrowings (118.0) (215.9) (190.8) (184.1) (184.1) (184.1) (184.1) Other long term liabilities (2.6) (12.0) (9.4) (7.9) (8.9) (9.9) (10.9) Net Assets CASH FLOW Operating Cash Flow Net Interest (10.4) (5.7) (7.3) (6.6) (5.8) (5.5) (5.3) Tax (3.7) (5.2) (10.1) (12.6) (12.6) (12.6) (13.2) Capex (14.9) (18.9) (18.7) (22.0) (20.0) (20.0) (20.0) Acquisitions/disposals (0.3) (149.5) Financing (1.7) 0.0 (2.9) (0.7) (1.5) (1.5) (1.5) Dividends (3.0) (10.6) (17.1) (21.0) (24.2) (26.0) (26.9) Net Cash Flow 16.6 (117.3) Opening net debt/(cash) HP finance leases initiated (9.6) (1.7) Other 2.8 (0.4) (0.5) (0.4) (0.0) (0.0) 0.0 Closing net debt/(cash) Source: Company, Edison Investment Research. *NB continuing operations only Polypipe Group 20 April

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