Approval of Trump’s infrastructure plan may lift CRH out of bear territory

CRH’s share price has fallen out of favour but US election results might offer it some hope for near term

CRH chief executive Albert Manifold in the Roadstone Cement Quarry in Dublin. The company’s share price has been battered in recent months. Photograph: Cyril Byrne

CRH chief executive Albert Manifold in the Roadstone Cement Quarry in Dublin. The company’s share price has been battered in recent months. Photograph: Cyril Byrne

 

A day after Ireland’s largest plc published its latest quarterly update, Mary Rhinehart, who only joined the board last month, stumped up $27,340 for 1,000 shares.

It’s small change for Rhinehart, who is chief executive of US insulation manufacturer Johns Manville, owned by Warren Buffett’s Berkshire Hathaway, but an important signal of confidence from CRH’s newest non-executive director.

CRH chief executive Albert Manifold is struggling, however, to win broader backing for the stock, which has fallen by more than 25 per cent from its highs this year – leaving it wallowing in bear market territory (that’s when the price of an investment falls by at least 20 per cent).

CRH’s trading statement on Tuesday didn’t help matters. The group forecast that full-year earnings before interest, tax, depreciation and amortisation (ebitda) will increase by 6.3 per cent €3.35 billion.

While it’s a record figure and double what CRH was making in 2014, it was 2 per cent below the consensus forecast from analysts.

Some of the number crunchers in stockbroking firms, it has to be said, are simply playing catch up with the market. The stock had already been punished recently as investors mulled a fresh spike in energy costs (CRH’s total energy bill this year will be more than €2 billion).

There were also warnings from peers in the United States such as Martin Marietta and Vulcan Materials about how severe weather in the autumn in CRH’s biggest market had dampened earnings.

Manifold signalled on Tuesday that CRH, the biggest building materials group in North America, lost 23 working days in September in Texas, the state that contributes more profits to the group than anywhere else, as it fell victim to one of its wettest months in record. That’s up from six days last year.

Troubled

CRH and other players in the building materials industry have also experienced a lag in passing on spikes in the cost of energy and bitumen – the sticky black stuff used for building roads – to customers. All told, the group has had to deal with a€300 million energy cost headwind this year.

It’s all overshadowed the happy news in the trading statement that the group’s troubled Philippines business, dogged in recent times by a decline in infrastructure spending, rising local competition, a flood of cheap imports, and rising costs, is seeing the beginning of a turnaround.

Davy analyst Robert Gardiner has worked out from CRH’s figures for the first nine months of the year that the Philippines unit – inherited in 2015 through its €6.5 billion acquisition of assets globally from European rivals Lafarge and Holcim as they sought competition approval for their own merger – turned in a 13 per cent jump in like-for-like sales in the third quarter.

Its ebitda had actually stabilised during the period, after a 59 per cent slump in the first half.

While Goldman Sachs analyst Patrick Creuset was disappointed by CRH’s full-year earnings forecast and the fact that the group’s net debt hit €7 billion in December, some 9 per cent above his figures, he was pushing the stock as a buy in the belief that the bad news has more than been priced in.

His €34.50 price target on the stock points to more than 40 per cent upside. Few investors are biting, though.

It’s a far cry from when CRH’s shares soared between April and June, amid signs that the recovery in its European markets was gaining momentum and as the group unveiled a €1 billion share buyback plan (its first in a decade), and set out ambitious plans to boost its margins and spend €7 billion on deals and investments by 2021.

Investors also cheered in May when Manifold put managers of its low-margin European distribution business on notice that it could be put up for sale as it carried out a strategic review of the business.

Dogged focus

While CRH has spent €13 billion on acquisitions over the past five years, Manifold’s dogged focus on maximising returns has resulted in €4 billion of underperforming and unwanted assets being sold off over the same period. The group spent an average of eight times ebitda for the businesses it has acquired, but received an average of 12 times ebitda for assets it has flogged.

Manifold made an early start on disposals within the European distribution unit in July, selling its DIY business in the Netherlands and Belgium, for €510 million. A final decision on the future of the rest of this unit will most likely be made next year.

Heading into 2019, CRH executives appear confident that energy costs will ease and that it can continue to hike cement prices in Europe, which it has only started to do of late. In the US, infrastructure spending is expected to be the main driver of construction over the medium term.

Manifold predicts that overall infrastructure spending in the US will increase by 15 per cent over the next three years, coming from both federal and state coffers.

But investors that piled into CRH as Donald Trump was elected US president two years ago in the hope that he would get a $1.5 trillion infrastructure package through as a priority are still waiting. Still, with the mid-term elections delivering a gridlocked Congress, an infrastructure bill would be one of the few things that might gain support from both Republicans and Democrats.

Could a breakout of bipartisanship get the bear off CRH’s back?

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