Holcim deal may boost CRH share price 24%

Analysts are signalling a near-24% jump in CRH’s medium-term share price on the back of it completing the purchase of certain assets from Swiss and French cement firms Holcim and Lafarge, and those assets making some contribution to the group’s current financial year.

The Dublin-headquartered building materials giant is spending €6.5bn on assets in Europe, the Americas, and Asia which need to be sold to facilitate the mega-merger between Holcim and Lafarge. With shareholder and regulatory approval received, CRH this week announced that its offer had been accepted by the sellers, who are now legally bound to the terms of the agreement.

The formal conclusion of the wider Holcim/Lafarge merger is expected during July and CRH’s element of the transaction is anticipated to be completed the following month, which would allow the group four months of contribution from the buys in its current financial year. However, it is expected that the publication of CRH’s first-half results, in August, will be too early to update on possible synergies from the new assets, which are currently being held by a trustee until formal conclusion of the transactions.

In a detailed research note on CRH, published yesterday, Davy Stockbrokers reiterated its “outperform” rating and a €32 price target for the stock.

CRH’s share price was at €18.73 in early January, but has been above the €20 mark since the end of that month — hitting €22.96 in early February, when management flagged the prospect of this so-called transformational deal with Holcim and Lafarge. It was recently trading at around €25.97, more than 13% (although hovering around €25.80 yesterday) up on when the deal was tentatively announced.

“CRH remains among our highest conviction long ideas in the building materials sector,” Davy analysts Robert Gardiner, Barry Dixon and Aidan Murphy said in the note. “We believe that the combination of a recovering existing business and a transformative and highly accretive acquisition makes for a compelling investment case.

“This thesis is unfolding as planned through 2015, with US end-markets improving and encouraging signs of life in Europe. We expect the stock’s strong run to continue as CRH completes and begins to integrate the acquisition from Lafarge-Holcim.”

Earlier this month, it was reported that Filipino investment firm AEV is set to co-invest with CRH in the purchase of the Philippines-based assets being bought as part of the Holcim/Lafarge sell-off. This is understood to be as a result of Philippines regulations stating that a certain level of local ownership is required on such large assets. Davy suggested the anticipated minority stake sale, in this regard, to be the only major divestment from the new assets that CRH is likely to make.

“The leeway provided by the ratings agencies means that CRH can maintain its investment grade credit rating without having to quickly dispose of newly-acquired assets. Early speculation had pointed to the group potentially partnering with private equity in the UK. This now seems unlikely, especially with the underlying business improving significantly. Likewise, Brazil was suggested as a possible sale, but we expect the group to take some time to assess these businesses before making a decision on disposal,” said Davy.