2023-11-15 23:10:36 ET
Summary
- CRH plc is a leading provider of building materials with a strong position in developed markets.
- The company has an integrated portfolio and is an M&A powerhouse, with an excellent track record of growth.
- The current backdrop is supportive for CRH, with robust infrastructure demand and growth in the US non-residential and residential markets.
- At the current valuation, we have a neutral rating on CRH shares.
We present our note on CRH plc ( CRH ), a leading provider of building materials solutions. We appreciate CRH's integrated portfolio offering, strong positioning in developed markets, and proven capital allocation skills however we find the shares fully valued, and we issue a neutral rating. We will provide a short description of the company and its activities as we initiate on CRH, analyze the portfolio and broader backdrop, value the equity, and discuss risks.
Introduction to CRH
CRH is a leading manufacturer of building materials in developed markets. The group manufactures and sells cement, aggregates, concrete, asphalt, lightside products, etc. CRH is an essential partner for road and critical utility infrastructure, commercial building projects, and outdoor living solutions. 75% of EBITDA is derived from North America and 25% from Europe. CRH is the #1 building materials company in North America, Western Europe, and Central & Eastern Europe. The fully integrated and interconnected business model creates scale benefits, increases flexibility and resilience, and maximizes growth and profitability. The company has an impressive track record of value creation for shareholders with a 15% compound annual total shareholder return since 1970. Over the last 5 years, EBITDA has compounded by 13% and EPS by 16%. CRH is listed on the NYSE and London Stock Exchange and has a market capitalization of ca. $42 billion.
Strong integrated portfolio and M&A powerhouse
CRH is a leader in the aggregates and cement (finite, valuable, and difficult-to-replace goods) markets, benefiting from a broad network of assets, and earning high margins. Moreover, CRH is a leader in the resilient and growing road solutions and utility infrastructure businesses, offering bespoke solutions across the project lifecycle. CRH's portfolio has undergone a significant transformation as the company has moved away from distribution activities (ca. $5 billion of divestments ) and refocused on residential and infrastructure end markets ( LafargeHolcim assets and Ash Grove acquisitions) getting exposure to urbanization trends and infrastructure upgrading. The group's integrated approach results in a deep involvement with clients, higher switching costs, enhanced competitive positioning, and less commoditization. CRH is an M&A powerhouse with a commendable track record of M&A-fueled growth: more than 1200 acquisitions in total generating nearly 2/3rds of historical growth. The company has a long M&A growth pathway given the very fragmented nature of the market and $35 billion of financial capacity over the next 5 years.
CRH's leading positions in high-growth markets combined with active portfolio management and a continued focus on business improvement have resulted in nearly a decade of constant margin increases, industry-leading returns, more than $20 billion of cash generated over the last 5 years, and major value creation for shareholders.
Supportive backdrop
The current backdrop is highly supportive of CRH. The US Infrastructure Investment and Jobs Act - the most important public investment program since the 1930s - supports more than 5 years of robust infra demand and CRH is uniquely positioned through its full-service offering to be a major beneficiary.
Moreover, onshoring activity i.e., bringing critical manufacturing back to the US, is set to drive US non-residential demand well into 2030 as manufacturing spending grows more than 2-fold. CRH is a partner of choice to some of the most complex construction projects globally and will greatly benefit from US non-resi demand growth. In addition, despite short-term headwinds due to rising mortgage rates, structural housing underbuild combined with favorable demographics and migration trends, underpin strong long-term growth in the US residential market.
Valuation and investment recommendation
We value CRH using EV/EBITDA multiples and FCF yields. We expect strong volume and pricing tailwinds in FY2024, as noted in various peers' guidance. Our estimates are largely in line with CRH's expectations and sell-side analyst consensus. CRH expects mid to high single-digit growth per year, which together with 25% operating leverage and further margin improvements lead to double-digit EBITDA growth, and double-digit EPS growth also supported by share buyback accretion.
We expect €34 billion of sales in FY2024 (or 4% growth) and an EBITDA of €6.2 billion (at a nearly 18% EBITDA margin). We moreover expect a net profit of €3.1 billion, €4.3 of earnings per share, and €3.2 billion of free cash flow. The current valuation implies a forward EV/EBITDA ratio of 7.2x, a PE ratio of 14x, and an FCF yield of 7.2%. The multiples are in line with historical averages: e.g. the 5-year average FCF yield stands at 7%, while the EV/EBITDA is at 7.5x. CRH trades more expensively than building materials peers and we believe this fairly reflects its superior business mix, higher earnings quality, and higher sustained growth rates. At 7.5x EV/EBITDA, our valuation would imply just 7% upside and a high single-digit IRR over the mid-term. Hence, we believe the current valuation does not represent an attractive enough entry point and we have a neutral rating on the stock. However, in case of share price weakness, given the quality and long-term outlook, we would suggest buying the stock. In addition, CRH has a great track record of capital returns with a 50-year history of uninterrupted dividends and a payout ratio of 40-50%, as well as a flexible and efficient capital allocation.
We would like to note we view the recent US listing positively, as it reflects CRH's geographical mix and allows for a larger investor base/audience.
Risks
Downside risks include but are not limited to worsening macroeconomic conditions, increasing interest rates leading to lower housing affordability and a prolonged residential market downturn, lower than expected infrastructure spending leading to lower volumes, longer-lasting inflation (especially oil, gas, bitumen, etc.), higher than expected carbon tax expenses, lower pricing power, capital misallocation e.g. value destructive M&A, FX risk i.e., currency fluctuations, legal and regulatory risks, etc.
Conclusion
While we like the fundamentals of CRH, we believe the shares are fairly priced and the risk/reward is currently not attractive. CRH is part of our European quality compounders bucket, and we will monitor the company and potentially revisit the investment case in the future.
For further details see:
CRH plc: Supportive Fundamentals But Fairly Priced