CRH eyes return to acquisitions and mergers in 2021

CRH executives have signalled that the building materials giant will return to the mergers and acquisitions trail in 2021 after an effective pause during Covid-19, even as the company prepares to take an $800 million (€674m) impairment charge on UK and Chinese assets bought in the past.

Chief executive Albert Manifold told analysts on a call on Tuesday that the $181 million spent so far this year on deals, including deferred costs for prior-year purchases, was the lowest he could recall at the company he joined 22 years ago.

He said the group deliberately held back on mergers and acquisitions (M&A) due to uncertainty around the pandemic, and as travel restrictions presented challenges assessing potential targets.

“We have capital. We want to do M&A. I would expect it to progressively improve as we return to that particular game.”

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The group forecast its underlying pre-tax profits will rise this year from the $2.2 billion reported in 2019, helped by a recovery in sales as economies continued to open up during the summer following the initial Covid-19 shock, price rises and tight control on costs.

However, the forecast does not take into account CRH's plans to take an $800 million full-year impairment charge, mainly against assets in the UK and China, as it assesses the economic impacts of Covid-19 and Brexit.

Mr Manifold noted that the UK, where CRH doubled down in 2016 through its purchase of quarrying giant Tarmac as part of a large international deal, has been affected in recent years by a construction slowdown prompted by Brexit and, more recently, Covid-19. Still, he added: "The UK remains an important market for us."

Earnings

CRH’s earnings before interest, tax, depreciation and amortisation (ebitda) rose 2 per cent to $3.4 billion in the first nine months of the year, even as sales dipped 2 per cent to €20.6 billion. It predicted full-year ebitda would come to more than $4.4 billion.

While it said this represented an increase in like-for-like earnings, it was lower than the €4.2 billion ($5bn) figure reported for last year, before the company switched from presenting figures in dollars from euro.

"While the outlook for 2021 remains somewhat uncertain, CRH's delivery this year should provide investors with further proof that it is the quality player in the sector," said Davy analyst Robert Gardiner. "Consistent earnings delivery and superior returns should provide the basis for a [share price] re-rating and continued outperformance over time."

Mr Gardiner said CRH’s forecast that its net debt would fall to about $6 billion by the end of 2020 implies its debt will be below 1.4 times ebitda.

“That is the lowest leverage reported by the group for many years. The improving debt position reflects a combination of ongoing strength in cash-generation and prudent balance-sheet management.”

Broken down by division, CRH's Americas materials unit saw like-for-like nine-month sales dip 4 per cent, with the negative effect of Covid-19 restrictions earlier in the year replaced by the impact in parts of the US by unfavourable weather and wildfires in August and September. While cement volumes fell in North America, these were offset by price increases.

Yet ebitda rose 9 per cent for the period, helped by “solid price progression, good cost-control and lower energy costs”.

Disruption

Like-for-like Europe materials sales were 7 per cent behind 2019, with an improvement in activity in the third quarter not enough to make up for the disruption of widespread Covid-19 lockdowns in the second quarter. Ebitda for the division declined 14 per cent over the nine months.

The group’s building materials business has been a standout this year, with nine-month sales up 3 per cent reflecting strong volumes in architectural products, improved pricing and cost control. Divisional ebita for the nine months was 9 per cent ahead of the prior year.