With increased housing, urbanisation and infrastructure requirements globally, three of Ireland’s building materials companies are faring well and have reported numbers that set them apart from their European and US peers. In their outlook statements and post earnings conference calls management were upbeat despite some headwinds to their UK divisions. These results not only demonstrate the strength of the management teams, but also the strategies taken to protect and grow margins and the strong balance sheets to do so.
Kingspan reported H1 numbers exceeding consensus forecasts coupled with an upbeat outlook statement for the remainder of the year, leading to market upgrades and a 10% move higher in the share price. While group margins were slightly lower at 9.7%, management expect these to recover later in the year to c.10%. Much of the decline was due to product mix and new markets in the Insulation Panels division. Brexit concerns weigh on larger projects being postponed in the UK, though the book is 6% ahead year-on-year and the group has seen growth in logistic warehouses to meet demand from the online space. All other end markets are encouraging with Germany, France and North America performing well and Brazil offering significant opportunities following the recent acquisition of Isoeste.
The balance sheet is strong with Net Debt/Ebitda at c.1.5x leaving management with plenty of fire power for further acquisitions. On a forward PE multiple of 20x the stock may not look cheap relative to the market, but with Kingspan’s industry-leading products there is potential for further growth opportunities in both existing and new markets. The management team has demonstrated their patience and competency in the M&A space and with plenty of skin in the game, some investors may feel happy to hold or increase their exposure to Kingspan.
Grafton Group’s recent results highlighted the strength of the management team and their successful strategy. H1 results led to further upgrades, revenue grew 9%, adjusted operating profit was up 14% and adjusted EPS up 19%. Despite a challenging market, their UK merchanting business outperformed market expectations highlighting management’s focus on costs, margins and the benefit of recent investments in the Selco brand. The geographic mix of sales has also supported group earnings despite challenges in the UK market (UK 67% of sales; Ireland 21%; Netherlands 5% and Belgium 3%). Both the Irish and Dutch markets have performed strongly, up 11% and 21% respectively year-on-year, a reflection of their improving economies, housing markets and strong consumer demand. On a forward PE multiple of 12x, the stock trades at a justified premium to the UK-based Travis Perkins given the geographic mix of sales, the strength in the balance sheet with Net debt/Ebitda of 0.5x offering this management team plenty of opportunities to grow the earnings in existing and new markets.
CRH reported H1 numbers ahead of consensus and expects the positive momentum in Europe and the Americas to continue in H2 2018. Margins in the US were marginally down, although the company outperformed its peers which reported a greater decline in margins. Pricing improvement was impressive across the European Heavyside and Americas Materials. Volumes were stronger quarter-on-quarter, not surprisingly given the harsh winter but it is good to see that this momentum has continued into Q3. Over the next 3 to 4 years management has guided an improvement in margins of 3%, cost savings to the tune of €400-€500m leading to potential cashflow generation of €7bn from which shareholders should benefit over time. The stock has been a poor performer, down 4.5% year to date, 12% since its high in June and trades at an unwarranted discount (30%) to its US peers. The market consensus 12-month price target is c.€34, which is about 20% upside from its share price at the time of writing. Given the company’s earnings momentum and an improvement in their end markets, the current weakness and discount offers a good entry price for portfolios.
These results demonstrate some of the key investment criteria for any portfolio manager. Good management teams are key, with a clearly defined strategy that leads to high cash generation without putting excess pressure on the group’s balance sheet.
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Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.