Could CRH rue some of its divestments in next downturn?

Company has sold off €4bn of unwanted assets, but its strength could be undermined

CRH chief executive Albert Manifold: his  willingness to call time on underperforming businesses has seen the  stock surge as much as 6 per cent in the past two days. Photograph: Cyril Byrne

CRH chief executive Albert Manifold: his willingness to call time on underperforming businesses has seen the stock surge as much as 6 per cent in the past two days. Photograph: Cyril Byrne

 

For financial hacks returning to work after Christmas and new year excesses, CRH’s annual “development strategy update”, issued in the early days of January, used to be a godsend during the boom.

It would typically reveal a collection of deals that had taken place under the radar overseas during the previous 12 months – surpassing the €2 billion level for both 2006 and 2007.

However, when he took over the reins almost four-and-a-half years ago, chief executive Albert Manifold was tasked with selling off swathes of assets snapped up before the financial crisis. When a global recession ensued, it exposed some dogs in its portfolio and positions in strange markets.

“We forgot the core principle of CRH, which is that we used to make businesses better,” Manifold said in February 2014 as he presided over his first results presentation. “We invested in bubbles.”

Subsequent sales included a minority stake in an Israeli company which produced cement for the widely condemned security barrier that separates the country from the Palestinian West Bank, a 50 per cent interest in a Turkish readymix concrete business and, more recently, the $2.6 billion (€2.3 billion) sale of a low-margin US distribution business, Allied Building Products, in January.

While Manifold has proven more than willing to whip out the chequebook – spending €6.5 billion in 2015 buying out assets spat out by European rivals Lafarge and Holcim under their own merger – he has presided over the disposal of €4 billion of unwanted and underperforming assets since he took charge.

“I have no interest in supporting businesses that are being subsidised by businesses that are making good returns,” Manifold said in an interview in April with The Irish Times.

The latest business to be put on notice is CRH’s Europe distribution unit, which analysts reckon could generate up to €2.4 billion. Manifold said on Thursday that he had started a “strategic review” of the operation – a euphemism that means only one thing for corporate financiers looking for fees and rivals scouting for acquisition targets.

The business – which sells and distributes building materials to professional builders, heating and plumbing contractors and DIY customers in continental Europe – makes up 16 per cent of the group’s €27.6 billion of sales last year. However, its €269 million of earnings before interest, tax, depreciation and amortisation (ebitda) equated to just 9 per cent of the overall group’s figure.

While its ebitda margin had improved to 6.5 per cent last year from 4.1 per cent for the previous year in a recovering European economy, the rate is barely over half of CRH’s 12 per cent overall margin for 2017.

Analysts estimate that a sale of the low-margin business should help CRH comfortably beat its own new target of boosting its ebitda margin by three percentage points by 2021.

Certainly, the market has bought into Manifold’s ongoing willingness to call time on underperforming businesses. The stock has surged as much as 6 per cent in the past two days.

But a European distribution sale, along with that of the US distribution business earlier this year, would drive a massive transition from its previous strength and diversification of having three equal-sized divisions: “heavyside” (cement, asphalt, aggregates and readymix); building products; and distribution.

Deutsche Bank analyst Glynis Johnson estimates that the group is now generating over 70 per cent of its earnings from heavyside. That’s even before a sale of the Europe distribution business.

“The previous portfolio balance that longer-term shareholders used to find reassuring as insulation (at least relative to others) to the cycle has now shifted in the past years to a much more cyclical exposure,” according to Johnson.

Could this leave CRH more exposed in the next downturn?

F&C bails on IFG after slump

Dublin-listed financial services IFG Group has lost almost of third of its value this year, making it one of the worst performers on the Iseq, as it dipped into a loss for 2017, dithered over what to do with one of its main units, and saw both its chief executive and chairman depart.

It seems that one long-time investor, F&C Investments (which has been part of Bank of Montreal since 2014), has had enough, selling its remaining almost 8 per cent in the market on Tuesday.

The shares seem to have been mopped up by a number of investors, with Dutch hedge fund manager Bram Cornelisse increasing his interest from 6.9 per cent to 8.8 per cent, and both Allianz and Strategic Equity Capital also adding to their positions.

While IFG is probably best known in Ireland for its former mortgage brokerage business, years of restructuring have resulted in a group comprising two UK businesses: James Hay, a provider of self-invested pension plans (SIPPs) in the UK; and Saunderson House, an investment adviser focused on professionals in the City of London.

The company warned last month that it sees a slowdown in signing on new clients at Saunderson House this year following uncertainty caused as the business was put up for sale earlier this year before being pulled off the market. The company is also fighting a potential UK tax fine of £20 million that James Hay faces over investments made in an unregulated biofuel scheme.

It takes a brave investor to buy stock in a company whose new chief executive Kathryn Purves’s departing words in a trading update last month were that she would come back with a plan for the business “in due course”.

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