S&P revises outlook on CRH as group to press pause on acquisitions

Chief executive says focus will be on integrating newly acquired businesses

Albert Manifold of CRH said 2018 would be a year of stabilisation at the company with the focus on integrating the newly acquired businesses and delivering on the synergies. Photograph: Gary O’Neill

Albert Manifold of CRH said 2018 would be a year of stabilisation at the company with the focus on integrating the newly acquired businesses and delivering on the synergies. Photograph: Gary O’Neill

 

Ratings agency Standard & Poor’s (S&P) has revised its outlook on CRH’s credit rating to negative saying its spending on acquisitions leaves the building materials group vulnerable to any potential weakening in the market.

The move came as chief executive Albert Manifold said the company expected to hit the pause button on major deals next year.

At an analyst dinner in London on Thursday, Mr Manifold said 2018 would be a year of stabilisation at the company with the focus on integrating the newly acquired businesses and delivering on the synergies.

CRH signalled earlier in this year that it had about €5 billion in cash to spend on acquisition deals over the next 18-24 months. However, it has already committed €3 billion of that to buying Ash Grove Cement, the fifth-largest US cement manufacturer, and a further $750 million on other cement acquisitions in Florida.

Core business

Smaller acquisitions strengthening the core business could be €500-€800 million as the group aims to reduce debt levels, executives signalled.

The deal for Ash Grove is expected to catapult CRH into the top three cement producers in North America and the group expects the company to generate a double-digit return in 2019.

However, S&P, which upgraded its long-term outlook on the Iseq heavyweight to BBB+ last year after it took on a more moderate acquisition strategy, said its decision to revise its rating from stable to negative stems from a risk that it may be stretched in the medium term.

“The negative outlook reflects our view that, although CRH should benefit from continued robust demand for its products and exhibit gradually strengthening margins, there will be very little ratings headroom for the group over the next two years, leaving it vulnerable to a downgrade,” S&P analysts said.

BBB+ rating is seven levels below S&P’s top-notch AAA rating for a company. It is three steps above what is considered sub-investment grade.

In addition to revising its credit rating outlook, the agency also affirmed “BBB+/A-2” long-and short-term corporate ratings on CRH.

Big dividends

Mr Manifold told attendees at the analyst dinner in London that a relatively modest investment in Ash Grove could yield big dividends with the firm operating at about 80 per cent capacity and any increase in cement output can be consumed within CRH’s downstream activities.

Executives also noted that US tax reform ould see the group tax rate fall by up to 3 per cent, amid US president Donald Trump’s plan to reduce the headline rate from 35 per cent to 20 per cent.

However, they also cautioned that a number of offsets would limit the total impact.

These included changes to the deductibility of interest expense, changes to the depletion allowance and excise tax.

Nonethless, the reduction in CRH’s group tax rate would range from 0.5 per cent to 3 per cent, depending on the legislation passed.