CRH boosts the cash margin as macro uncertainties gather

Some market watchers have posited that CRH (CRH) will be subject to a slowdown over the second half of 2022, but it doesn’t appear quite so clear cut. Bosses at the construction materials supplier admit that although a cocktail of cost inflation, economic uncertainties and geopolitical issues provide an unfavourable trading backdrop, cash profits are expected in the region of $5.5bn (£4.7bn), a 10 per cent year-on-year increase. Half-year profits on that basis came in at $2.2bn, with the underlying margin at 14.7 per cent, a 90 basis point increase over the same period last year.

The fact that margins not only held firm, but increased, is encouraging given that inflation had already seeped into the global economy by June 2022. The Americas materials and building products segments, which account for roughly two-thirds of sales, delivered double-digit profit growth on a like-for-like basis thanks to higher pricing coupled with operating efficiencies. Margins have been shored up and that is certainly encouraging, yet investors would be justified in questioning the extent to which future cost increases will be passed through to customers. And if economic conditions deteriorate further – a distinct likelihood – it is conceivable that large construction and infrastructure projects could be put on ice or even cancelled.

That’s obviously a downcast scenario and CRH could find ongoing support from large-scale infrastructure programmes, particularly if economies start to flatline and governments take a Keynesian line. Last year’s US infrastructure bill is set to deliver $550bn in new federal investments over a five-year period, although the precise allocations are not clear at this stage.

The group continues to evolve, evidenced by the acquisition of Barrette Outdoor Living in July for an enterprise value of $1.9bn. That followed the sale of the Building Envelope business in April 2022. CRH has invested $2.8bn in acquisitions year-to-date. It’s clear that management is intent on repositioning the business regardless of the general malaise, although it is also clearly committed to returning cash to shareholders. In June, a further $300mn buyback tranche was announced, which is due for completion at the end of September.

Operating cash flows were down on the first half of 2021 due to an increased investment in working capital, “reflecting the impact of cost inflation and prudent supply chain management”. Trade receivables are up by a quarter since the year-end, but this was largely down to timing issues.

These results demonstrate that when you are further up the corporate food chain, it’s the duration rather than the severity of economic downturns that really matters. CRH is better insulated than most through its scale and the long-dated nature of many of the projects it supplies. A forward rating of 10 times UBS’s adjusted EPS forecast represents a viable entry point, economic woes notwithstanding. Buy.

Last IC View: Buy, 3,336p, 3 Mar 2022