2023-11-14 05:44:32 ET
Summary
- CRH's share price has seen a 6.2% increase since listing on the NYSE in September, supported by its interim results, share buybacks, and dividend growth.
- The company's sales and profit figures exceeded expectations, with a strong performance in the Americas market. It expects EBITDA to see further growth for the full year 2023.
- Its market multiples are better placed, too. While there's a limited short-term upside, it's one to buy on dips over the next year and hold it for at least 3-5 years.
Since transitioning its primary listing to the New York Stock Exchange in late September, the Irish building materials company CRH ( CRH ) has seen a 6.2% uptick in share price. This is a decent price gain in less than two months and is also in line with the continuous gains it had seen even earlier.
A look back
When I last wrote about CRH in August, its price had gained 42.6% over the past year. With the strong gains, its market multiples indicated that it was fairly valued at the time.
Further, with a winding down in sales growth in the first quarter (Q1 2023), some caution was called for. Total sales were up by 7% year-on-year (YoY), while like-for-like [LFL] sales had slowed down to 5%. This was compared unfavourably with a 12% increase in both total and LFL sales for the full year 2022. As a result, it downgraded the rating to Hold, after reinforcing a Buy three times before that.
The share buybacks underway did provide an impetus for some price rise, but it was how its impending interim results (H1 2023) played out that would determine the share price trajectory going forward. Here, I look back at these numbers to assess whether the stock can continue to rise now.
Upside revenue surprise
CRH's figures for both sales and profits exceeded my expectations. At 8% year-on-year (YoY), the sales figures picked up pace slightly from the 7% seen in Q1 2023. In my estimates, I had assumed, in hindsight, conservative growth of 5%, based on the Q1 2023 LFL figure and in keeping with weakness in its European market, with a substantial 38.4% revenue share in H1 2023.
LFL sales did slow down further to 4% in H1 2023. And the European market stayed sluggish too, with a 0.5% decline in H1 2023. However, the overall sales figure came in closer to the total figure, as compared to LFL sales, due to a continued robust performance in the Americas market, which saw 13.5% growth.
Lower than expected margin, earnings uptick
The company’s EBITDA margin came in slightly lower than my estimate of 15.95%, at 15.6%. The number is still an improvement over the 14.7% figure seen in H1 2022, as the company had anticipated, but it’s also a softening from the 17.2% number for the full year 2022.
The number is stronger than last year, in both its Americas and Europe markets (see chart below). The improvement in margins for Europe is particularly encouraging considering the weak sales figures. The company attributes it to cost savings, which more than made up for cost inflation.
The profit from continuing operations also came in higher at USD 1.2 billion, compared to my estimate of USD 1.1 billion, resulting in an EPS of diluted earnings per share [EPS] of USD 1.57 (My estimate: USD 1.48). However, as expected, its EPS dropped from last year, considering that over half of its profits in H1 2022 were generated from what are now, discontinued operations.
The outlook
Unlike in the Q1 trading update, where it provided qualitative guidance, the company has now also provided a numerical outlook. It expects EBITDA to come in at USD 6.2 billion for the year, an increase of 10.7% YoY. This is a correction from the 14.7% growth in H1 2023, but it's healthy growth nevertheless.
Assuming that the net attributable profit to equity shareholders to EBITDA ratio remains the same as in H1 2023 at 46.3%, the profit figure would come in at USD 2.9 billion, a 9% increase from the profits from continuing operations last year.
Market Multiples
The forward GAAP price-to-earnings (P/E) ratio from this outlook comes in at 14.6x now, which is competitive compared to the 15.9x for the materials sector. Similarly, the trailing twelve months [TTM] GAAP P/E ratio at 15.5x is also slightly lower than that for the sector at 15.75x. At best, the multiples show that there’s an 8-10% upside to the stock for now.
However, there are two more aspects to consider. The first is its share buybacks. In March, CRH announced USD 3 billion worth of share buybacks in the next 12 months, which is around 7% of its current market capitalisation.
It has already undertaken USD 2 billion of the repurchase programme so far, with USD 1 billion done in H1 2023 and another USD 1 billion by the end of Q3 2023. Going by the inching up in price recently, it's likely that the remainder buybacks can have a beneficial impact on price too.
CRH also pays a dividend. The TTM yield is small at 0.4%, but it does add at the margin to the total returns. Also, CRH has increased interim dividends recently by 4%.
The economy and industry
Some improvements in the economy are also something to consider for a cyclical sector like construction. Interest rate hikes are all but done and inflation has come off significantly in the US economy over the past year. This eases off any cost pressures and can be a positive for demand as well. While the growth prospects for the economy aren’t bullish (see chart below), they can be balanced by some growth improvement in Europe.
The Dodge momentum index, which is a leading indicator for the US construction sector, has seen a month-on-month uptick recently but is still down by 8% YoY in October. The index leads construction activity by 12 months, which is a risk to consider.
What next?
The combination of softness in the construction cycle coupled with limited price upside for now indicates that over the next year, CRH could show indifferent performance at the stock market. However, as growth picks up in the medium term, coupled with its strong historical performance, it still looks good. The best investing strategy for the stock now is to buy it on dips over the next year, with the view to holding it for at least the next three to five years. I'm upgrading CRH stock to Buy again.
For further details see:
CRH: Continued Performance Despite Downsides (Rating Upgrade)