CRHCF - CRH plc: Stable Prospects Likely Priced In

2023-09-27 12:30:03 ET

Summary

• 1H 2023: Revenues and profits up despite macro headwinds, driven by robust performance in their biggest market, North America.
• Prospects are optimistic, particularly in North America due to a number of growth drivers.
• Integrated solutions strategy and scale advantages position the company to defend market share and capitalize on multi-year growth opportunities.
• Prospects appear baked into the price.

Building materials and services giant CRH plc's ( CRH ) prospects are optimistic driven a positive construction market outlook in North America, the company's biggest earnings driver and a market in which CRH is a market leader with significant competitive advantages. Their prospects appear baked into their valuation.

Company Overview

CRH manufactures and markets building materials (such as asphalt, concrete, cement) for the infrastructure, residential, and non-residential sectors in around 29 countries around the world. The company has four reportable segments:

Americas Materials Solutions: this segment provides solutions for the construction, RMI (repair, maintenance, and improvement) of public infrastructure, homes, and commercial buildings in North America. This is CRH’s biggest segment accounting for around 37% of revenues. The segment accounted for around 31% of operating profits, the company’s second-biggest earnings contributor as of 1H 2023.

Americas Building Solutions: this segment produces a wide range of architectural and infrastructural solutions for use in the building and renovation of critical utility infrastructure, commercial and residential buildings, and outdoor living spaces. This segment generates around 23% of revenues, its third-biggest revenue generator but the segment is CRH’s biggest earnings driver as of 1H 2023 accounting for 39% of operating profit.

Europe Materials Solutions: this segment provides solutions for a range of construction applications including public infrastructure, homes, and commercial buildings. This is CRH’s second-biggest segment accounting for nearly 30% of revenues and is the third-biggest earnings generator accounting for 23% of operating profit.

Europe Building Solutions: this segment manufactures, supplies and delivers innovative solutions for use in the building and renovation of infrastructure, commercial and residential buildings and outdoor living spaces. This is CRH’s smallest segment generating less than 10% of revenues and around 6% of operating profit.

1H 2023: resilient revenue growth, profits up double digits

For 1H 2023, CRH’s revenues rose 8% YoY on a reported basis (up 4% on a like-for-like basis) to $16.1 billion on the back of resilient underlying demand in key end markets, strong pricing offsetting inflation, and contribution from prior-year acquisitions.

The Americas segments reported robust performance helping offset sluggish performance in Europe:

Americas Materials Solutions segment revenue rose 9% YoY to $6.059 billion primarily driven by strong pricing activity. Segment operating profit jumped 26% YoY to $510 million and segment operating margins rose to 8.4% from 7.3% the same period last year.

Americas Building Solutions segment revenue rose 21% YoY to $3.8 billion driven by strong prior year acquisitions. Sales were up 1% on a like-for-like basis. Segment operating profit rose 19% YoY to $633 million. Segment operating margin dipped slightly to 16.6% from 17% the same period last year.

Europe Materials Solutions segment revenue was in line with the prior year (up 5% on a like-for-like basis) as strong pricing offset lower activity levels driven by high interest rates and adverse weather conditions. Operating profit rose 24% YoY to $383 million and operating margins increased to 8% from 6% the same period last year.

Europe Building Solutions segment sales fell 4% YoY (down 6% on a like-for-like basis) impacted by extended winter conditions and softer residential demand. Segment operating profit declined 27% to $101 million and segment margins dropped to 10.8%.

Looking ahead, CRH’s prospects are optimistic. Infrastructure spending in North America, CRH’s biggest market accounting for over 70% of the company’s total operating profit, could grow driven by the Infrastructure Reinvestment and Jobs Act which will invest $110 billion in new funding over the coming years for roads, and bridges. As the biggest asphalt paving company in North America, CRH is poised to benefit. Reshoring trends meanwhile could drive non-residential construction activity medium term . A possible interest rate cut late next year could spur a pick-up in residential construction activity. Research forecasts predict a mid single digit growth rate for America’s construction market over the coming years. As a major construction materials player across key categories including concrete, sand and gravel mining, and concrete pipes, CRH is positioned to benefit.

Acquisitions have helped drive growth for CRH (over $3 billion was spent on acquisitions last year) and the company still has capacity to remain acquisitive going forward helped by strong cash flows (over $2 billion in 2022) and manageable leverage. CRH’s free cash flows have grown at a CAGR of 11.5% over the past decade and the company has a debt to equity of 52 currently.

Given the high cost of transporting construction materials, players with extensive operations (like CRH who operates across 48 states across the U.S. spanning over 1,700 locations) wield considerable competitive advantages. This competitive advantage is further strengthened by the company’s acquisition strategy which focuses on vertical and horizontal integration which enable the company to offer customers an integrated solution (as opposed to merely being a supplier of commodity base materials) combining multiple materials, building products and services at a level of scale to deliver solutions on time and on budget smaller rivals may struggle to match. CRH competitive advantages suggest the company is well placed to defend and possibly capture market share going forward.

Their pricing power and value-add is apparent in their margins which have been on an upward trajectory over the past decade. Operating margins have increased from 1.9% a decade earlier to 12% in FY2022 and net margins rose from (1.6%) to 11.7% in FY2022.

Conclusion

CRH has a moderate buy analyst consensus rating. Seeking Alpha’s Quant system rates it a buy as well.

At a forward P/E of 13.6, CRH’s valuation doesn’t seem expensive compared to the sector median (13.95), and CRH’s 5-year average of 15.2.

Taking the following assumptions suggests CRH is worth around $36 billion, slightly less than their current market capitalization of $39 billion. Given the cyclical nature of the construction industry, margin assumptions are normalized based on figures over the past decade (as opposed to extrapolating them from the most recent fiscal year) adjusted up slightly to account for scale economies and pricing power due to their differentiated position as an integrated solutions provider rather than merely a supplier of base materials.

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