Global materials group CRH (CRH) has always been on the acquisition trail, securing dozens of bolt-on purchases over the years. But even by its standards the near-€8bn (£7bn) spent on deals in 2015, including a truly transformative acquisition of assets sold as part of the Lafarge/Holcim merger deal, was exceptional. Assisted by strong markets in the US, a recovery in Europe and increasing infrastructure spending, CRH is now reaping the rewards of this dealmaking and is throwing off cash at such a rate that another big acquisition could be possible as soon as next year.
- Strong trading in the US
- Signs of recovery in Europe
- Very strong cash generation
- Debt levels to fall
- Modest dividend
- Vulnerable to adverse weather
CRH's management now expects buoyant trading, coupled with last year's deal frenzy, to push cash profit up to €3bn this year from €2.2bn last year. And with debt reduction better than expected, the half-year dividend payment was recently increased for the first time in eight years.
Apart from acquisitions, the two key drivers behind the growth are strong trading in the US (which accounts for over half of group revenue) and the high sensitivity of profits to sales gains. Cash profit in the six months to June this year more than doubled to €1.12bn, and operating profit was up threefold at €588m. All seven reporting segments delivered an increase in margins, and pro-forma cash margins for the group rose from 8.1 per cent to 9 per cent.
CRH is continuing to make small acquisitions, but spending of €150m was nearly all balanced out by disposal proceeds of €140m. Of the acquisitions, a lion's share came within the US, where trading looks very encouraging. On the materials side, US cash profit more than doubled to €251m, underpinned by an increase in infrastructure spending and also residential and non-residential demand. However, good weather, as enjoyed in the early part of the year, remains a key influence, and a bad winter could affect volumes. Momentum in construction markets is expected to continue into the second half, although the very strong finish in US markets in 2015 means that comparisons with last year will be that much tougher.
| (CRH (CRH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,578p | MARKET VALUE: | £21.4bn | |
| TOUCH: | 2,578-2,579p | 12-MONTH HIGH: | 2,627p | LOW: 1,581p |
| FORWARD DIVIDEND YIELD: | 2.3% | FORWARD PE RATIO: | 16 | |
| NET ASSET VALUE: | 1,516¢* | NET DEBT: | 54% | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 18.0 | 0.57 | 49 | 62.5 |
| 2014 | 18.9 | 0.81 | 86 | 62.5 |
| 2015 | 23.6 | 1.08 | 94 | 62.5 |
| 2016** | 28.4 | 1.81 | 155 | 64.4 |
| 2017** | 29.3 | 2.17 | 185 | 69.5 |
| % change | +3 | +20 | +20 | +8 |
Normal market size: 1,000 Matched bargain trading Beta: 1.13 *Includes intangible assets of €7.7bn, or 927¢ a share **Numis forecasts £1=€1.16 | ||||
Trading in Europe reflected the early stages of economic recovery, while heavyside operations were boosted by the inclusion of assets acquired from the Lafarge/Holcim merger. On a pro-forma basis, sales were ahead by 4 per cent, but more than doubled when including the acquisition.
Operating profit did even better, rising from just €38m to €162m. Regional variations remain, however, with a stronger performance in the Netherlands, Ireland and Denmark partly offset by more subdued trading in Switzerland, Poland and Germany. Lightside operations, which include construction accessories, shutters and awnings, reported flat sales revenue in the first six months at €477m, but operating profit was ahead by 15 per cent at €38m. On the distribution side, cost control and better procurement more than doubled operating profit to €53m, even though sales revenue was virtually unchanged. Having completed the integration of Lafarge/Holcim assets, the target on cost savings has been hiked by €10m to €90m.
In the newly formed Asia division, predominantly comprising LH assets acquired in the Philippines, pro-forma sales grew by 4 per cent and cash profit by 7 per cent to €58m, with benign costs helping to boost margins.
Net debt at the end of June rose by €5.9bn a year earlier to €7.1bn, reflecting the high acquisition costs in the second half of 2015, while cash outflow of €300m was lower than the seasonal pattern. More importantly, rigorous discipline on capital expenditure and working capital management means that strong cash generation is expected to drive net debt down to €6bn by the year-end, taking it to what the group regards as a normal level compared with cash profit. For 2017, the improvement is forecast to continue, with Numis pencilling in net debt of just 1.4 times cash profit, opening the prospect of another noteworthy acquisition or even a return of capital.
