Construction-related stocks constitute cornerstone of Irish shares index

ANALYSIS:CRH, Kingspan and Grafton together account for some 30 per cent of the Iseq, writes BARRY O'HALLORAN

BEFORE THEY were obliterated, the banks had a disproportionately high weighting on the Irish stock exchange, now that they are all but gone, there’s a more disparate group of shares at the top of the market.

Oddly enough, one of the sector’s that well-represented there is the one that went south with the banks over the last three years: construction.

Thanks to the sheer size of the main component of this, international building materials group, CRH, construction-related stocks can account for anything over 30 per cent of the benchmark Iseq index of Irish shares.

At close of business on Wednesday, CRH accounted for 27.6 per cent of the index, a level it has been at since midway through last year. The other two big players in the sector, Kingspan at 2.1 per cent and Grafton at 1.9 per cent, brought this up to a total of 31.6 per cent.

All three published their 2010 results this week. Notwithstanding the by-now normal caveats about challenging market conditions, they were reasonably upbeat about their prospects in 2011.

CRH, which published its results on Tuesday, had more or less flat revenues of €17.17 billion in 2010 and saw pretax profits fall by 27 per cent to €534 million. The year had more than its fair share of bumps.

Earnings fell below initial expectations in the second half, knocking its price down to the €12 region, a point from which it rebounded.

The results that it published on Tuesday were in line both with guidance that the group issued in November and with market analysts’ projections. There were no surprises.

CRH is hoping to return to profit growth this year. This is likely to be partly driven by acquisitions, and it seems clear from remarks by chief executive Myles Lee earlier in the week that it is going to step up activity on this front in 2011.

Elsewhere, infrastructure spending in eastern Europe and continued growth in Germany are likely to boost its overall European operations, although activity in other regions is set to remain flat.

CRH is a big spender on energy and uses oil byproducts in bitumen – a constituent of asphalt. While the current spike in oil prices is a result of unrest in North Africa, a big producer, the underlying trend in oil prices is up.

Lee said that CRH anticipated this trend last year and hedged much of its requirement for 2011, a move that will spare it the worst consequences of current increases.

Citi analyst Aynsley Lammin was cautious about the group’s prospects this week. The bank has nudged its target price for the group up to €17 – it was trading around the €16 mark yesterday afternoon – and is basing that on stronger trading prospects for this year.

However, Lammin reckons it will be into the second quarter of the year before we get a clear picture of where CRH is going in 2011.

Insulation and energy-saving technology specialist Kingspan has returned to profit after a torrid period that began with the industry’s general decline in 2007.

Last year, revenues were up 6 per cent at €1.2 billion while operating profits increased 5 per cent to €107.6 million. Stability in Britain, growth in the US and strengthened positions in both continental Europe and Australia were the main contributing factors. The company also cut its debts to €128.7 million from €164.3 million.

The company believes that 2011 will be tough but less uncertain than recent years, a view that most analysts shared this week.

DIY specialist and builders’ merchant Grafton, reported yesterday.

Increased profits and reduced debt also featured on its results.

The group was arguably the quickest of the three to respond to the recession and took out plenty of costs.

This left it with a healthy balance sheet and strong cash position throughout the recession, both of which were in evidence again yesterday.

The company believes that it is well-positioned to capitalise once the recovery begins in its main British and Irish markets. Davy analyst Flor O’Donoghue recommends the stock as a “hold” on the basis that its current price reflects its recent performance and strengths.