HLBZF - CRH: Positive Quarter And Guidance Reaffirmed

Summary

• Looking at the sector, CRH is currently less impacted by higher energy costs.
• Despite uncertainties and higher prices, we expect a robust second half of the year (still supported by private and public expenditures).
• $5.5 billion EBITDA reiterated so we decide to initiate with a buy rating.

Here at the Lab tower, we cover construction companies very well. We initiated coverage on Lafarge Holcim ( HCMLF, [[HCMLY]]) and HeidelbergCement ( HLBZF, [[HDELY]]) with two buy ratings supported by a similar thesis on Government Keynesian spending. In addition, the former was backed by multiple arbitrage opportunity thanks to the latest company's acquisition with Firestone and the latter was sustained by the Italcementi acquisition and its important implication on the Italian real estate bonuses. We also commented on their half-year performance - below their respective links:

1. LafargeHolcim: Comments On Q2 2022 Results
2. HeidelbergCement: Comments On Q2 2022 Results

Since our initiation of coverage, we were not very lucky with the timing and we doubled down our investment size. Today, we will analyze CRH plc ( CRH ) taking advantage of its late earnings release and its implication for energy price development. Even if it is the first time that we follow up on CRH in Seeking Alpha, we are well acquainted with the company. The construction player is a diversified building material company that engages its activities in manufacturing and distributing products from heavy materials to construction accessories such as shutters and awnings.

Energy price overview and implication for CRH

Despite the greater uncertainty about the future prospects given the war in Ukraine, our internal team has decided to overweight the sector. Indeed, the construction sector in the United States and Europe will see their volumes grow this year in the wake of what happened in 2021. Neither geopolitical events in Ukraine nor the rising inflation are weighing on the sector's demand for construction worldwide, although there is no lack of risks.

Going into the details of the US market, residential demand will show a growth trend this year despite the increase in mortgage rates; while in the non-residential sector the trend will change according to the end market, but at aggregate level, the outcome will be positive. More in specific, emerging markets will suffer more, particularly in India and Indonesia where companies in the sector must deal with greater pressure on margins. Looking at the half-year results, the main market players managed to recover from the economic crisis triggered by the pandemic and were able to benefit from a favorable price-cost mix. Moving on to the end of 2022, the major obstacle is represented by the increase in energy prices - this represents a critical factor and it is very hard to determine whether the sector will be able to pass on the increase in the cost of energy to sales prices.

Looking at the exposure to energy, we should note that the cement industry is energy-intensive. Having analyzed all three companies, HeidelbergCement scored with the highest energy cost as a percentage of its EBITDA at almost 50% against Lafarge Holcim at 40% and CRH at 32%. The Irish giant is actually the less impacted. Regarding Holcim, we should note that looking at the current disinvestment (India and Brazil) and its growth in the roofing division, we might expect a lower % of energy costs in the future.

Q2 results

CRH delivered a good set of numbers in the first half of the year. EBITDA reached of $2.210 billion and was more than 4% ahead of VARA consensus estimates. All in all, EBITDA gained 21% on a year-on-year comparison with a plus 13% in like-for-like growth. A strong performance was recorded both in the Americas and Europe. The Irish company once again was able to offer turnkey building solutions for important projects enhancing its profitability. This business model is recording solid results in North America, whereas it is only partially developed across Europe. This will add an interesting upside to the European division over the medium-term horizon.

Conclusion and Valuation

The Irish construction player is well positioned to benefit from some of the cyclical growth of the US construction sector given the increase in infrastructure spending, and on the other side of a structural rationalization of its asset portfolio. Our internal team is estimating a 5% growth at the EBITDA level (whereas the company set a 10% target for the year-end). Important to note was the operating cash flow development that decreased compared to last year's semester; this was due to higher investment in the working capital requirement, but more important was net debt evolution that was down by $1.7 billion from the 2022 year-end. This was due to higher disposal proceeds than acquisition expenditure. CRH also managed to increase the interim dividend per share by 4%. Considering the lower exposure in the energy cost, and the guidance reaffirmed for $5.5 billion in EBITDA for the year, we derive a target price of €48 per share in line with the 6.5x used to value Holcim.

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