CRH builds in US but hits a wall in Bric and euro zones
ANALYSIS:CRH’S CLEAR message around its interim results yesterday was that there was nothing to worry about.
It was at pains to point out that its declining Ebitda (earnings before interest, tax, depreciation and amortisation) had been flagged in early May and its performance mirrors that of many of its peers, namely a decent first half of the year in the US, counterbalanced by dreadful trading in recession-hit Europe.
The markets didn’t seem to be entirely convinced. CRH’s share price fell by just under 5 per cent in London, where it now has its primary listing, and by 5.35 per cent in Dublin.
Analysts were quick to pare back their forecasts. Company broker Davy has scaled back its earnings forecasts for the full year by 4 to 5 per cent while Dolmen noted that “the cautious tenor of management’s outlook and implied pull-back in Ebitda guidance will weigh on the stock over the short term”.
It’s tough going for construction-related stocks at present, particularly those operating in Europe, where many economies across the region are in the doldrums.
There is little light at the end of the tunnel in relation to the euro zone crisis and this is likely to affect CRH for the foreseeable future.
At face value, its 5 per cent sales increase in the first six months looks good.
However, the like-for-like rise was just 1 per cent with a strong dollar contributing the balance of the increase by way of foreign exchange revenues.
There was quite a divergence in the performance of its European and American divisions.
Profits in Europe fell by 13 per cent in the first six months but rose by 26 per cent in the Americas. Europe’s economic woes have been well documented and chief executive Myles Lee hopes that strong action from EU policymakers in the autumn will provide some positive momentum.
Don’t hold your breath on that score.
When it comes to Europe, the risks are all on the downside. Germany is keeping its head above water but France appears to be only a small step away from recession and CRH reported weak trading in the Netherlands and Switzerland, two of Europe’s better performing economies, in the first half of the year.
And the Irish construction sector remains a basket case. Yet more restructuring of the business in Europe is on the cards.
CRH expects its like-for-like sales in Europe to show a higher rate of decline in the second half of the year than the 5 per cent fall posted in the first six months.
In the Americas, CRH said it benefited from “favourable early weather conditions” and a “generally firmer tone in construction markets in the US”.
The pace of economic growth has slowed in the US in recent months and the company forecasts softer sales growth in the second half of the year.
Investors can’t even pin their hopes on the burgeoning economies of Brazil, Russia, India and China (Bric).
Volumes in China are down by 20 per cent. India’s economy has come off the boil and Brazil has the “sniff of a bubble about it”, according to company executives.
CRH is a conservatively managed company and takes its own sweet time around investing in new markets. It has probably missed the boat in terms of the stratospheric growth rates of the Bric countries.
Then again, those decisions might stand it in good stead in the coming years.
On the plus side, it has a strong balance sheet and is offering investors a decent dividend yield of 4 per cent.
Its businesses in Germany, Finland and Poland are benefiting from growth in those economies and it continues to acquire assets, which inject new blood into the business and help it to keep moving forward.
However, with Europe accounting for about 40 per cent of its business, any improvement in investor sentiment will probably only occur when the region’s political leaders finally get to grips with the euro zone crisis.