Liontrust
Building better cities for growth and sustainability
Ed Phelps, Investment Manager at Liontrust
It is estimated that 68% of the world’s population will live in cities by 2050 compared to 55% today. Of this expansion, 90% is expected to be in Asia and Africa, of which 35% will be in three countries: China, India and Nigeria.
The benefits of higher urban density include greater productivity and innovation for service industries, better access to and utilisation of goods and services, and more energy efficient construction and transportation.
It does bring substantial sustainability challenges, however, including through urban sprawl. This is the low-density physical expansion of cities that occurs when land-use growth exceeds population growth and urban planning. It can lead to greater environmental impacts from increased land use and forms of transport, as well as social issues such as income inequality between localities.
Even when sprawl is avoided, cities face significant challenges such as minimising construction and operating emissions, providing affordable housing for those on low incomes, avoiding poor air quality, and climate change adaption to cope with heat island effects and surface water flooding.
There are a number of solutions emerging to deal with the challenges around cities, such as modern methods of construction, digitisation of buildings (to create efficiencies in construction and maintenance), HVAC (Heating, Ventilation and Cooling) and BACS (Building Automation and Control Systems).
One of the companies we hold in our Building Better Cities theme is Swiss group Sika, which produces specialist construction chemicals for the building industry. Sika has five core technology competencies: thermoplastic systems; adhesives; mortars; coatings; and concrete systems. Construction accounts for around 80% of Sika’s revenue and its positive impact comes through its ability to reduce the environmental impact of products.
Firstly, 45% of group sales and 70% of sales in developed markets are in renovation, which is increasing the efficiency of buildings through measures such as better insulation or sealing. Secondly, its products improve durability and longevity – for example, by making a structure more resilient through water-proofing.
Currently, cement production is estimated to account for up to 8% of global carbon emissions. Yet with increasing urbanisation leading to rising demand for infrastructure – and ultimately, cement – the environmental impact of this key material looks set to rise sharply. Cement emissions are difficult to reduce because there are no other materials available at the required scale.
Sika has a range of innovative chemical admixtures that enhance the properties of concrete, such as its ViscoCrete and Sikament products. Its cement additive Sikagrind reduces the attraction of fine particles during grinding in the production process of cement, reducing the carbon-intensive clinker content of concrete and the environmental emissions that come with it. Sika estimates that ViscoCrete, Sikament and Sikagrind save 100 million tonnes of cement annually and prevent 65 million tonnes of carbon dioxide emissions.
Many of Sika’s products improve the performance of materials and so either reduce the amount used or prolong the lifespan of a building. Extending the useful life of a building reduces the frequency of demolition and reconstruction, thereby reducing resource demand and emissions.
Sika has also developed a novel process that can recycle concrete waste from demolition and reuse it as building material again, rather than downcycling it to be used as road tarmac, which is the standard today.
Construction typically contributes 5% to 10% of economic output for the global economy. With cement production accounting for between 6% and 8% of global carbon dioxide emissions, even a quarter reduction could move us noticeably closer to net zero. Because Sika generates 80% of its sales from construction, it has a significant ability to contribute to sustainable development.
Demand for Sika’s chemicals should grow at a faster rate than the overall construction market as its products achieve greater penetration within an industry seeking to reduce embodied carbon emissions.
Sika targets average annual revenue growth of between 6% and 9%; we think this is very achievable through a combination of organic and acquisitive growth. Organic growth should be supported by Sika’s significant R&D investment, with market share gains accruing as it creates or enters new product spaces. In 2021, Sika filed 90 patents and increased its R&D workforce by over 10% to 1,240.
In addition, considerable organic growth has also come from expansion to under-penetrated regions. Sika gained a significant first-mover advantage in terms of brand and customer relationships ahead of some peers in Asia and, more recently, Africa and Latin America.
Sika has the opportunity to further consolidate a very fragmented construction chemicals market. Sika is one of the larger players with 11% market share, with the top 30 in the industry only representing 45%. Sika’s scale and relatively low cost of capital allows acquisitive growth to form a key part of its strategy – by acquiring smaller companies on lower valuation multiples, earnings enhancing growth can be readily achieved.
For Investment Professionals Only. Capital at risk. This marketing communication does not form part of a direct offer or invitation to purchase securities. Before making an investment decision, you should familiarise yourself with the different types of specific risks associated with the Sustainable Investment team. This information can be found in the final Prospectus and Key Investor Information Documents (KIIDs) available on our website: www.liontrust.co.uk. This advertisement is a financial promotion under the Financial Services and Markets Act 2000 which has been approved and issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business.
