CRH sets sail for New York
By the time you read this, yet another Irish company will have set sail to find its fortune in America. This time it is CRH which considers, as do most in the market, that it is undervalued in Europe and that it could and should trade at much higher multiples in the US. Those of you who have been following our commentary over the past three years will be familiar with this and with our thoughts that once it began reporting in US dollars rather than Euros back in 2019, the move was inevitable, possibly only delayed by the pandemic.
It has been a long road travelled, with many bridges crossed (possibly better to say constructed for both) since the company was formed through the 1970 merger of two leading Irish companies, Cement Ltd, founded in 1936, and Roadstone Ltd, established in 1949.
Through acquisition and coinciding with Ireland’s entry into the then EEC, in 1973 CRH expanded out of Ireland into the Netherlands. It subsequently moved into the US market in 1978, again through acquisition. Further acquisitions followed in the US in 1981 and 1985. The focus moved back to Europe in 1986 and 1987 with acquisitions in the Netherlands and Spain respectively, before a further acquisition in the US in 1988. Expansion accelerated in the 1990s with CRH entering new markets, increasing its footprint across North America, and building a presence in Eastern Europe. By the turn of the century, CRH had grown into one of the world’s leading building materials companies with a presence in 18 countries at over 1,100 locations.
In the first decade of the 2000s, the company completed an average of 52 acquisitions per year, consolidating in Europe, entering the US cement market for the first time, and investing in emerging markets. In the second decade, after 20 years of acquisitive activity, CRH effected a business transformation, which saw it not only make strategic acquisitions but also start a divestment programme to trim non-core and/or lower margin less profitable businesses. Acquisitions saw the company continue to consolidate its position in North America (becoming one of the top five cement producers), and Western and Eastern Europe as a building materials supplier, while divestments saw it exit both the US and European distribution sectors.
Over the past three years, the company has not only marked 50 years in operation but also successfully negotiated the unprecedented challenges thrown up by the COVID-19 pandemic. While continuing to make strategic divestments, including its Building Envelope business, the company has also looked to expand into other higher margin customer-facing operations. This was particularly evident when it expanded its Architectural Products footprint in 2022 with the acquisition of Barette Outdoor Living.
After all that development how does the market value CRH today? As we have said before, CRH currently trades at around 13x forward P/E and 7.5x EV/EBITDA, which makes it expensive relative to its European peers, which trade at 9x P/E and 6x EV/EBITDA. US investors, however, would appear to be willing to pay more for a quality stock in the sector, CRH’s US peers trading at 22x forward P/E and 13x EV/EBITDA. We would think that now that CRH derives c.75% of its profits in the US and is listed there, once US investors who can only hold US-listed equities get better acquainted with the company, the multiples should expand, i.e. the price will rise against a little change needed in the business metrics.
While the move in primary listing has been grabbing the headlines, it is the underlying business that warrants trading at a higher price. The latest set of numbers, the 2023 interim results, were issued towards the end of August. Not only did they come in better than expected, but guidance was also upgraded. Looking forward management flagged Group EBITDA of c.$6.2bn, full-year net operating cash inflow of c.$5bn, and year-end net debt to EBITDA in the 1.1x to 1.3x range. At the time we opined that the H123 results and guidance would suggest a 4% uptick in consensus numbers at the EBITDA line. The stock did, however, end the day down 1.7%, we believe this was because with the stock up over 40% year-to-date coming into the numbers, the market was possibly expecting a little more. The price drifted in September but appears to have found support at the €50 level, which given the above-noted difference in valuation, we would see as presenting an opportunity to buy into or add to positions in a company with good growth prospects as it starts its journey on a new stock exchange.
We value CRH on a peer comparison basis, weighting the discount it trades at versus its US peers with the premium it trades at to its European peers on the geographic breakdown of profit (75:25 US: Europe). On that basis, despite rallying 37% year to date, CRH is still trading at an average 35% discount to its peers. Trading at parity would imply a €80.42 ($54.40) share price. That said, at the time of setting the target price, we applied a 20% discount, half to reflect residual uncertainty on macro-economic conditions, and half to incorporate the volatility risk after transfer of the premium listing. We rounded up the implied share price of €64.33 to €64.35 (now $69.00) as our recently upwardly revised price target. It was previously €58.50. The over 25% upside supports our Buy recommendation.
To conclude, CRH is a well-managed company with relatively little debt that has developed from its Irish origins to become a global leader in building materials supplies while more recently expanding into more customer-facing, higher-margin businesses in North America. We believe the underlying value of the stock will be better appreciated by US investors after the switch in primary listing and that this will generate price appreciation over the short to mid-term.