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CRH leveraged for growth

CRH spent €8bn 2015 and the benefits should soon show through.
February 4, 2016

Building materials giant CRH (CRH) is set to reap the rewards of its €8bn (£6.1bn) development spending spree in 2015 as increased scale and a recovery in the US market feed though to rising profitability. During 2015 CRH made 20 bolt-on acquisitions as well as a substantial purchase of assets from the Lafarge/Holcim merger, not to mention the $1.3bn (£912m) purchase of CR Laurence.

IC TIP: Buy at 1819p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Strong cash flow and disposals reducing debt
  • Dividend payout likely to rise
  • Exposure to improving US market
  • Big contribution to come from acquisitions
Bear points
  • Unknown effect of bad US weather
  • European trade still sluggish

To fund this spending, CRH made disposals of around €1bn, but this didn't stop net debt ballooning by €4.5bn in the year to September 2015 to €8bn. Debt at the December year-end is expected to have dropped back to below €7.5bn and the company's strong cash generation coupled with funds generated from further asset sales means CRH expects to restore debt to normalised levels in 2016.

CRH's business now looks well set to benefit from the 2015 deal-fest. The Holcim/Lafarge assets, for example, are expected to have contributed cash profit of €340m in 2015. And CRH reckons there could be scope to improve on the €90m of synergies in its initial estimate. There is likely to be more detail on this when full-year figures are released on 3 March.

CRH (CRH)
ORD PRICE:1,819pMARKET VALUE:£15bn
TOUCH:1,817-1,819p12M HIGH:2,000pLOW: 1,602p
FWD DIVIDEND YIELD:2.9%FWD PE RATIO:15
NET ASSET VALUE:1,524¢NET DEBT:64%

Year to 31 DecTurnover (€bn)Pre-tax profit (€bn)Earnings per share (¢)Dividend per share (¢)
201218.10.637662.5
201318.00.574962.5
201418.90.788162.5
2015*23.00.888862.5
2016*28.71.7616268.8
% change+21+100+85+10

Normal market size: 1,000

Matched bargain trading

Beta: 1.16

*Investec forecasts, adjusted PTP and EPS figures £1=€1.311

The recent acquisitions should be bedding in as demand continues to grow in the recovering US market, boosted by increased activity in housing construction. Given strong momentum in the first nine months, CRH reckons that full-year cash profit here will be up by more than 17 per cent from a year earlier. America accounted for 61 per cent of last year's cash profit. On the materials side, nine bolt-on acquisitions and three investments will add annualised sales of around $200m (£139m), as well as over 253m tonnes of aggregate reserves. While last year's numbers will not be affected, bad weather in January may put a dent on growth in the current year.

CRH is also starting to make progress in Europe. Decent weather is expected to have helped to nudge cash profit in Europe on heavyside activity to marginally ahead of the €380m generated in 2014, while improvements are also expected from the lightside operations. However, on a regional basis, business continues to remain patchy. In Finland, demand for aggregates and cement has remained subdued, while lower volumes and strong competition has had an impact on its Swiss operation. Pricing remains tough in Poland, while in the Ukraine a 30 per cent drop in the exchange rate against the euro has taken its toll. On the other hand, trading in Ireland and the Benelux area continues to improve.