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CRH suffering in the gloom

Created:

19 December 2008

Written by:

Jonas Crosland

BULL POINTS:

■ Sound finances

■ Hedge against sterling's weakness

BEAR POINTS:

■ Falling demand for building materials in Europe

■ Heavy exposure to US housing market

■ Output restricted by poor weather

Shares in CRH are trading at 28 per cent below their 12-month high as building materials suppliers remain out of favour. But this fall is modest compared with, say, the drop of 88 per cent in the share price of SIG (another listed building materials supplier). And the worry is that, by the company's own admission, trading is set to get worse.

Back in August, management was already adopting a cautious stance, warning that the 10 per cent decline in first-half profits would be repeated in the second half. Since then, conditions have shown a marked deterioration, and City analysts expect that the percentage fall in underlying profits for 2008 will be somewhere in the mid-teens. The good news is that earnings per share are likely to be less affected, a result of a lower-than-expected tax charge.

CRH is the world's second largest maker and distributor of building materials and, as such, is directly exposed to the worsening global economic climate and its effect on construction. And the downturn has spread to virtually every market. So, whereas construction growth in, say, Poland and the Ukraine during the early part of the year more than compensated for weakness in Ireland and Spain, this is no longer the case. That said, growth in the first half will probably still be enough for the European materials division to turn in a small improvement on 2007 for the full-year.

Pressure is also intensifying on the European products division, mainly as a result of a collapse in house building. This has necessitated further capacity cuts and cost restructuring, notably in the UK clay business, and divisional operating profits are now expected to be down by around 25 per cent from a year earlier.

Trading in the US has also been hit badly by weakness in the housing market and bad weather during September and October, although materials sales have remained strong enough to allow the company to pass on higher input costs by increasing prices. Even so, operating profits are expected to show a mid-teen percentage decline, although, after taking into account the dollar/euro exchange rate, the full-year decline in euros is expected to be around 20 per cent.

Click here for a guide to the terms used in IC results tables.

On a brighter note, plans by US President-elect Barack Obama to implement the biggest infrastructure spending for more than 50 years will help to bring in more work, although the benefits will take a while to show through. Meanwhile, business outside the US is likely to deteriorate further.

CRH has also spent around €1bn (£900m) on acquisitions, but much of this has yet to bring any benefit because a €200m investment in 26 per cent of Yatai Cement in China is still bogged down awaiting regulatory approval, as is the €400m acquisition of Pavestone in the US. CRH has also made significant investment in new cement plants both in Ireland and the US, but their costs may now take longer to recoup as demand slows. In fact, capital spending in 2008 is unlikely to be higher than it was in 2007 and may fall by 25 per cent in 2009.

At least CRH has solid finances. While net finance costs for this year are expected to rise by 10-20 per cent, net interest is expected to be covered 7.5 times by cash profits. Around €800m of long-term funding, through issuing bonds, and a further €700m of bank funding has been raised this year. CRH is also close to renewing and extending €1.5bn of bank facilities maturing in 2009.

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