Earnings are set to soar at CRH (CRH) as the result of a deal that will transform it overnight into the world's third-largest building materials company, following the €6.5bn (£4.92bn) acquisition of assets that came up for disposal as a condition of Lafarge's merger with Holcim. The deal looks great for CRH and the company is an old hand at wringing synergies from acquisitions, and expects to see annual cost savings of around €90m by year three. But, given CRH's impressive track record, there could be even more to come, especially since company guidance of 1.8 per cent cost-saving synergies is well below historic savings of 3-5 per cent that it has achieved on previous acquisitions.
- Holcim/Lafarge assets acquired in attractive deal
- Disposals expected to have generated €400m in 2014
- Dividend payout likely to rise
- Significant cost synergies expected
- European trading remains patchy
- Unknown effect of bad US weather
The acquisition is being financed with €2bn in cash, new debt and a placing of 74m new shares. The placing is equivalent to about 10 per cent of the share capital, and at 1,650p - a 6 per cent discount to the share price - the issue raised around €1.6bn. The deal takes the 2014 pro-forma net debt-to-cash profit ratio to 3.2 times, but this is expected to fall quickly, helped by proceeds from an ongoing €2bn disposal programme, which raised about €400m in 2014.
So what has CRH bought? NewCo, as the assets have been named, is a global producer of cement, aggregates and ready-mixed concrete across North America, western, central and eastern Europe and emerging markets. In 2013, it produced 23m tonnes of cement, 79m tonnes of aggregate, 8m tonnes of asphalt and 10m cubic metres of ready-mixed concrete. Revenue generated in 2014 is expected to reach €5.1bn, producing cash profit of €752m. Around two-thirds of revenue is generated in Europe, which is where CRH currently generated just under half its pre-acquisition revenues.
Completion of the acquisition is likely to be towards the middle of this year, and NewCo is expected to be around 25 per cent accretive to underlying earnings and to generate a return on invested capital in line with CRH's weighted average cost of capital. Return on equity is expected to be in the high teens by 2016.
In the US and Canada, the acquisition will significantly strengthen CRH's prime position in heavy building materials, while in central and eastern Europe, CRH will become the largest building materials company. The assets will also double its exposure to emerging markets.
| CRH (CRH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,753p | MARKET VALUE: | £14.3bn | |
| TOUCH: | 1,752-1,753p | 12-MONTH HIGH: | 1,811p | LOW: 1,220p |
| FORWARD DIVIDEND YIELD: | 2.7% | FORWARD PE RATIO: | 18 | |
| NET ASSET VALUE: | 1,255¢ | NET DEBT: | 40% | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2011 | 18.1 | 726 | 85 | 62.5 |
| 2012 | 18.1 | 634 | 77 | 62.5 |
| 2013 | 18.0 | 568 | 49 | 62.5 |
| 2014* | 18.8 | 759 | 78 | 62.5 |
| 2015* | 23.6 | 1350 | 126 | 62.5 |
| % change | +26 | +78 | +62 | - |
Normal market size: 1,000 Matched bargain trading Beta: 1.39 *Investec Securities forecasts, adjusted PTP and EPS figures £1=€1.32 | ||||
CRH's enlarged geographical footprint is expected to allow the company to expand its bolt-on acquisition model. Furthermore, there is growing evidence to suggest that the timing of the acquisition is pretty good. Interest rates are currently probably as low as they will ever get, while earnings and margins in the so-called 'heavy-side' sector look to be at cyclical lows.
That said, growth in the global construction cycle is likely to remain patchy. It's probably too early to say, but the heavy snow experienced in some parts of the US could slow down construction work for a while - half of 2013 revenues came from the Americas. So far, though, sales have been moving in the right direction, growing by 4 per cent in the first half and by 6 per cent in the third quarter. And, weather aside, trading is benefiting from strong activity in new housing construction and increasing state funding for highway work.
In mainland Europe, there are mixed trends. Sales in the first half of the year were up by 6 per cent, but fell 2 per cent in the third quarter. Strict cost controls meant that third-quarter profit was very close to the previous year, but the outlook is very much a mixed bag.
Fourth-quarter guidance from the company suggests that profit will be similar to the strong quarter recorded in the previous year. Second-half profit is expected to be ahead of the €1.08bn recorded in the previous year, with full-year cash profit forecast to grow by around 10 per cent.
