CRH: building on a solid foundation

TEN days before Christmas, Goodbody Stockbrokers blew a raspberry in the direction of that long-term pillar of the Irish stock exchange, CRH, when it issued an unwelcome sell recommendation on the stock.

According to analysts Robert Eason and David O’Brien, the “slowdown in Europe is a concern. The concerns over Euroland are already manifesting itself in lower confidence levels in the construction sector and downgrades to GDP forecasts”.

The view of the brokers is that the share price has been technically boosted by the company’s decision to move its primary listing to the London Stock Exchange, with a secondary listing being maintained in Dublin. As a result of the move, CRH qualified for inclusion in the prestigious FTSE 100 group of top companies, ensuring that it appeared on the radar of a wider group of institutional investors.

CRH’s partial withdrawal from the Dublin market is seen as a big blow to the ISEQ, already reeling from the collapse in Irish bank stock values and the departures from its main list of key players such as Jefferson Smurfit and Greencore.

For Irish investors, CRH has been one of the enduring success stories of the Irish stock market.

It was among the first Irish companies to expand successfully in the US, where Irish-based multinationals are now major players.

It also expanded in Europe, beginning with the Netherlands in 1974.

This allowed it to escape the confines of the highly cyclical Irish construction and building materials economy ahead of a particularly severe downturn — that of the 1980s.

By the Noughties, CRH had grown to become one of the world leaders in building materials, employing 75,000 in 3,600 locations across 35 countries.

The group has appointed its leaders from within, maintaining consistency in management style and strategic approach.

Its preference for acquiring small to medium-size players, preferring to leave local management in place, as part of a “bolt on” strategy, is well known.

Over the years, it has become a major player in the US highway development programme and its revenues are split almost half and half between Europe and North America, ensuring that it was sufficiently diversified to absorb downturns in any one part of its market.

CRH took full advantage of the so called “Goldilocks years” when the construction sector boomed.

However, the recession has taken its toll since early 2007, with the share price down by more than half on peak levels.

Its strong focus on developed country markets has served it less well at a time when the baton of growth has passed to the emerging economies of Asia and Latin America.

Management has escaped criticism in the main. In fact, the highly diversified company is seen as having weathered the downturn pretty well.

In 2009, it managed to raise €1bn in a rights issue, one of the largest fundraisings in Irish corporate history.

The company had expected to make use of the buying opportunities provided by widely anticipated deleveraging in the sector to fund an ambitious programme of purchases.

However, the anticipated opportunities did not arise and CRH bought much less than expected, leading to some criticism among the brooking community.

However, CRH has always eschewed the grand purchase, opting in the main for bolt on acquisitions.

Its chief executive, the Cork-born Myles Lee, comes from a strong accountancy and financial background.

He was never likely to throw caution to the wind despite calls on him from some analysts to engage in a concerted push into emerging BRIC and associated economies where CRH to date has been relatively modestly represented.

CRH has invested in north-east China, but has generally been cautious about moving into a market where financial transparency is often lacking.

The 2010 annual report breaks down activities across europe between three economy types: “austerity economies”, accounting for 20% of earnings ; “stable economies” — 40%, and “developing economies” — 40%. Revenues from India, China and Turkey are included in the “European materials category”.

It may be time to separate these regions from the rest. Sadly, more EU and Eastern European markets will surely have drifted into the austerity category last year.

CRH appears better prepared than most organisations for a prolonged downturn. In the 2010 annual report, Lee wrote: “CRH is well used to managing and responding to building industry cycles. However, the scale and synchronised nature of the current downturn has been unprecedented.”

The group points to an estimated €2bn savings over the 2001-2011 period from its “cost reduction/operational excellence” initiative.

This has not prevented US investors, in particular, from criticising the company for offering too high salaries and pensions to staff.

Just over 65,000 staff are in defined benefit schemes, though pension costs have dropped by €6m to €73m Recently, the chief executive signalled that profit before tax in 2011 would be up by between €20m and €50m on 2010 levels. However, revenues and profits are way off the levels of 2006-7.

In three years, the cumulative decline in like-for-like revenues has amounted to 30%, nor does 2012 look like being anything other than a year to simply try and get through.

Myles Lee recently admitted that the group had been making contingency plans to meet the event of a eurozone break-up.

While such an event is not expected, it is clear that many accidents are queuing up, waiting to happen.

Already in 2012, we have Iran threatening to block the Straits of Hormuz, a vital transit point for Middle East oil and gas, with the prospect of a surge in energy prices should this happen.

In Europe, the sovereign debt crisis continues unabated.

In the US, there has been some relief in the form of better than expected employment figures.

Moves by the Obama administration to rein in military spending could be positive for infrastructure investment and CRH.

However, Credit Suisse, this week joined Goodbody in downgrading CRH, along with Heidelberg Cement, because of its high exposure to Europe and its travails.

Despite this, CRH has been opening its purse, shelling out a total of €600m on acquisitions in 2011, most in the second half.

Barring cataclysm and the spread of protectionism, expect CRH to continue its policy of calculated expansion. But don’t expect Myles Lee and his colleagues to break the bank in pursuit of a large fancy deal.