CRH rating downgraded as cracks begin to show
MERRION Stockbrokers has downgraded building materials giant CRH, saying that cracks are beginning to show in the business and calling into question the long-held case for a premium rating on the stock.
The downgrade came as CRH yesterday announced the sale of its Ivy Steel & Wire subsidiary in the US for $51m (€37m).
Analyst David Holohan said he has lowered his rating on CRH shares from 'buy' to 'hold', noting that questions have arisen concerning the company's under-exposure to developing markets and its capital management and corporate development. Shares in the group closed flat at €14.80.
Based in Texas, Ivy generated sales of $104m last year. It became part of CRH after the group acquired MMI in 2006.
Mr Holohan said in a new research report that continuing challenges in the US and European construction markets are unlikely to improve significantly in the near term. However, he acknowledged that while 2011 will be dominated by the same negative themes that impacted this year, 2012 will see a stronger performance.
"We remain concerned that the slowdown experienced by CRH in the US across residential, non-residential and infrastructure construction will continue into 2011 as the fundamental drivers of each remain weak," said Mr Holohan. He added that there is no indication of a turnaround in the US housing market, although he does expect a pick-up in non-residential construction in the final quarter of next year.
Mr Holohan also raised concerns on US highway spending, which is of critical importance to CRH. In 2009, infrastructure spending made up 65pc of earnings before interest, tax, depreciation and amortisation (EBITDA) at CRH's US-based Oldcastle subsidiary, which in turn made up about 37pc of CRH's group EBITDA.
In the absence of a new highways bill, said Mr Holohan, visibility remains limited as states begin to show signs of "buckling under their existing debt loads". He said he is "very concerned" about the budgetary difficulties being experienced by states that are key for CRH, and what appears to be a "lack of urgency" in providing a new federal highways bill in the near term.
Among its competitors, CRH is the most exposed to the US for a greater part of its revenue and Mr Holohan argues that this makes the company "more vulnerable" to the slower levels of economic growth.
Earlier this month, CRH reaffirmed its 2010 earnings guidance and said declines had been stemmed.
But Mr Holohan said a poorly-timed share buyback, followed by a large rights issue and cuts in guidance made in August, "sit poorly with investors".