2023-11-08 06:10:00 ET
Summary
- CRH Plc is a leading aggregates and infrastructure company with operations in the United States and Europe.
- The company has a successful history of disciplined operations and capital allocation, with a focus on attractive acquisitions and divestitures.
- CRH's vertical integration and diverse product offerings position it well for growth in the construction industry, particularly in the US.
The following segment was excerpted from this fund letter.
CRH Plc ( CRH )
While the market has recently been focused on GPU chips and AI scripts, our attention has been on cement blocks and crushed rocks. We've enthusiastically made CRH one of our largest positions ever at cost due to its limited downside. CRH is among the largest aggregates and infrastructure companies in the United States and Europe and has recently relisted to the NYSE from the LSE, which we believe will be a catalyst for the stock to rerate upwards towards peer valuations as its undeniable value hiding in plain sight becomes more widely discussed.
In 1970, Cement Limited and Roadstone Limited, two Irish infrastructure-focused companies, combined to form Cement and Roadstone Holdings, or "CRH.” An investment of $1 million into CRH upon its founding since that fateful merger ~53 years ago would have turned into ~$1.5 billion by mid-year 2023, an annualized total return to investors of 15.0%, a high rate of compounding we think can continue.
Half a century of success at CRH has been driven by disciplined operations and capital allocation that we believe derives from a company culture built around appropriate financial incentives. CRH’s M&A playbook has proven to be successful as an acquisitive company like CRH can't compound at a rate of 15% over 50 years unless acquisitions and divestitures have been executed at attractive prices. Over the last five years, CRH has spent $10.3 billion on acquisitions while receiving $10.5 billion in proceeds from divestitures across dozens of transactions, with the average acquisition multiple ranging from 7x – 8x EBITDA depending on the year and the average exit multiple clocking in at 11x EBITDA.
As currently constructed, the Company has four primary segments, with EBITDA contribution as follows:
The Materials Solutions segments are vertically integrated across construction products and services – producing and supplying aggregates, cement, ready mix concrete, asphalt, and related services such as road paving. The aggregates business has terrific economics, as most operate as local oligopolies or monopolies. If you are a user of aggregates, you will almost certainly use the closest quarry to your project because the cost to transport aggregates is such a high percentage of the value of the actual product. It doesn't make sense to try and get a discount from the quarry 15 miles further away because all the savings will be more than eaten up by increased transportation costs. The industry has historically enjoyed stable annual pricing increases, and over the last 52 years, aggregates annual pricing has only dropped year-over-year in three of those years (and only by -1.5% on average). 13 CRH is sitting pretty with the largest aggregates mineral reserves in North America at 19B US tons – comfortably more than Martin Marietta (17B tons) and Vulcan Materials (16B tons).
On the cement side of the business, industry dynamics are like Greg Focker’s portfolio — strong to quite strong . It is very difficult to add cement capacity in the United States because of stringent environmental regulations, so the domestically produced supply is maxed out at around 100M metric tons per year. CRH has about ~11% market share across its 12 plants in North America. At the same time, even with depressed residential development as of late, US demand is running at ~120M metric tons per year. Excess demand is supplied by imports, which come at a significantly higher cost than domestically supplied cement. To state the obvious, this supply/demand dynamic has been very favorable for cement pricing, a trend we see continuing.
CRH is among the largest asphalt manufacturing and paving companies in the United States and has clear advantages of scale that help the Company produce best-in-class margins on this product. Bitumen is a key component in producing asphalt, and due to CRH's massive size, they have a "winter-fill" program that allows the Company to acquire bitumen cheaply in the winter months and store it for use during warmer construction months, which results in a cost advantage against smaller competitors that lack access to that kind of infrastructure.
A key differentiator for CRH is its vertical integration. Materials produced in the aggregates and cement business are supplied as components to downstream businesses like asphalt and ready-mix concrete. The integration between the Materials Solutions business and the Building Solutions business provides customers with end-to-end solutions whereby they only must deal with one vendor compared to a handful. We believe this improves logistics and helps projects get completed on time and on budget. CRH can construct components off-site and deliver them on an as-needed basis, reducing labor on-site and idle time from unorganized logistics scheduling between disparate third-party vendors.
The Building Solutions segments manufacture and supply outdoor products such as hardscapes, fencing, railing, masonry, packaged products, lawn and garden, pool finishes, and composite decking, in addition to concrete infrastructure, precast products, drainage systems, water management, and other construction components.
The first subsegment of Building Solutions is the Outdoor Living business. This business has one of the broadest offerings of products for public and private outdoor spaces - including Pebble Tech pool finishes, MoistureShield composite decking that competes with Trex, Barrette railing and fencing, and Belgard paver stones and outdoor kitchens. If you have recently remodeled your backyard, it is highly probable that you’ve installed at least one of their products.
The next subsegment of the Building Solutions segment is the Building & Infrastructure business. This business provides critical infrastructure for connecting, protecting, and transporting water, energy, and telecommunications infrastructure. This segment thrives on large complex projects and as mentioned, is fully integrated with the upstream Materials business. CRH is heavily involved early in a project's lifecycle, beginning with the design phase, and they develop customized solutions given their expertise and broad capabilities. Here is an example of a stormwater upgrade in Tampa, FL, that the Company completed in 2022. A main thoroughfare was repeatedly flooded during storms in the area, and CRH's team was able to eliminate flooding and reduce pollution runoff associated with these weather events by installing a comprehensive stormwater management system—Lord knows Houston could use some of these.
Currently, about 75% of CRH's EBITDA is earned in North America (~10% higher than the average S&P 500 company), and the remaining 25% is earned in Europe and the rest of the world, with the Company having expectations that 90%+ of earnings will come from North America in the coming years.
Across all CRH, 55% of revenue is derived from repair, maintenance & improvement, and 45% is derived from new construction. Revenue split by sector is ~40% infrastructure, ~30% residential, and ~30% non-residential.
US Infrastructure Tailwinds:
As one of the largest building materials businesses in North America, CRH may be the single largest beneficiary of the recent unprecedented government infrastructure spending programs, including the Infrastructure Investment and Jobs Act (IIJA), CHIPS and Science Act (CHIPS), and the Inflation Reduction Act (IRA). For instance, of the $1.2 trillion in IIJA funds, about $350B is allocated to Highway funding, and CRH is the #1 road paver. Throughout the 5year life of the spending bill, this would increase the federal spending on highways by abou t 50% above the baseline 2021 spend , from ~$47B p.a. to north of $70B per year. 14 The IIJA has been touted as the most transformative public investment program since the 1930's.
Perhaps equally as important as the IIJA spending is the onshoring of manufacturing that is occurring in the United States, with the support of the CHIPS and IRA. This has led to $200B+ of major commercial projects that have already been announced to bring critical manufacturing back to the US. These "mega projects" are squarely in the sweet spot for CRH, and they offer significant visibility for the infrastructure business through 2030. The Company has quantified the increase in annual manufacturing-related spending in the US as 2.5x higher than previous levels.
Many of CRH's top markets are benefiting from ongoing interstate migration and strong job growth, with three of CRH's top states ranking among the top four in terms of employment growth since 2019. Not only will strong local economies help to keep state budgets flush at their current record levels, but this growth necessitates increased infrastructure investment, and a significant piece of IIJA funding will go to these states. Note CRH still has exposure to other fast-growing states like AZ and NV that fall just out of its top 10 states.
Relisting:
As noted above, CRH completed a relisting to the US on September 25 th and now maintains a primary listing on the NYSE, with a secondary listing on the London Stock Exchange. This relisting will entice more investors over the coming year to rerate the stock much closer to US peer valuations rather than languishing at European peer valuations. Once the sell side and US-based investors grow familiar with the name, we believe the inexplicable valuation gap will be too hard to ignore and the market will do its job of appropriately valuing CRH as the best-of-breed operator within an advantageous industry.
In addition to increased investor awareness, the Company has cited increased business opportunities as CRH will appeal more to customers who favor dealing with US-based companies, not the least of which are state and local governments. It will also provide better opportunities on the M&A side through better visibility and a strong currency in US company stock for potential acquirees.
CRH has a keen focus on being well represented in US-based indices and once the Company files its 2023 10-K around March 2024, they will be eligible to be included in the S&P 500, which provides another major catalyst from passive flows and index-constrained active managers alike.
Valuation:
We believe the current valuation of CRH provides for limited downside and is significantly cheaper than peers, despite being a best-in-class operator across all the business segments the Company competes in. CRH trades at an 11.5x P/E based on the '24 consensus and 7.0x EV/EBITDA (6.4x our estimate). As shown below, the most relevant peers are trading around 10-15x 2024 EV/EBITDA and around 18-28x on an earnings basis, a significant premium to CRH despite it having much lower leverage and better cash flow conversion.
It is also worth highlighting the fact that the Company has provided guidance for $35B of cash generation over the next five years, an amount equal to >90% of the Company's current market cap. We estimate this is comprised of $25B of FCF generation and $10B from re-levering the balance sheet from 0.8x net debt/EBITDA to about ~2.0x.
Our price target, based on our 2025 estimates, uses a 10.3x EV/EBITDA multiple, which implies a ~20x P/E multiple. This equates to a ~$120 per share value (including dividends received), which is ~118% above the current price of $55. We would expect these estimates to be priced in about one year from now, by late 2024. These assumptions are conservative relative to historical comparable company valuations of around 20x – 30x NTM P/E.
Likewise, on an absolute valuation basis, we think US investors should soon recognize that a company with this level of stability in operations, an enviable capital allocation track record, and robust earnings growth visibility should not trade at just 11.0x earnings.
Disclosures and Notices:Beginning January 1, 2020, all investment activity is conducted by the Voss Value Master Fund, LP (the “Master Fund”), which has two feeder funds, and therefore performance figures from January 1, 2020 onward are calculated based on the Master Fund. All limited partners invest in the Fund through one or more of the following feeder funds: Voss Value Offshore Fund, Ltd. (the “Offshore Fund”) and Voss Value Fund, LP (the “Predecessor Fund”), each a “Feeder Fund”. Performance figures for the Predecessor Fund are contributable to Travis Cocke as sole portfolio manager. Mr. Cocke maintains the same the position with the Fund and the Fund will employ a similar strategy as the Predecessor Fund. Actual returns are specific to each investor investing through a Feeder Fund. Each Feeder Fund was established at different times and has varying subsets of investors who may have had different fee structures than those currently being offered. As a result of differing fee structures, differing tax impact on onshore and offshore investors, the timing of subscriptions and redemptions, and other factors, the actual performance experienced by an investor may differ materially from the performance reported above. Portfolio statistics shown are inclusive of the Predecessor Fund and the Offshore Fund. Net results are presented after deduction of all operational expenses (including brokerage commissions), 1% per annum management fee, and 20% performance allocation. Prior to Q1 2023, 2022, and 2023 net results were presented at the Fund/feeder level but were subsequently updated to match the method of presentation used for the Fund’s 2022 Audited Financial Statements. A full chart is available upon request. This letter is provided by Voss Capital, LLC (“Voss”, “the Firm”, “the Voss Team”, and “our team”) for informational purposes only and does not constitute an offer or a solicitation to buy, hold, or sell an interest in the Voss Value Fund, LP (the “Fund”) or any other security. An investment in the Fund is speculative and involves substantial risks. Additional information regarding the Fund, including fees, expenses and risks of investment, is contained in the offering memorandum and related documents, and should be carefully reviewed. An offer or solicitation of an investment in the Fund will only be made pursuant to an offering memorandum. This communication is confidential and may not be reproduced or distributed without prior written permission from Voss. This confidential report is only intended for the recipient and may not be redistributed without the prior written consent of Voss. 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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Voss Capital - CRH Plc: Undeniable Value Hiding In Plain Sight