CRH shares could soar in 'bluesky' scenario - Davy
Shares in CRH could soar to €46 in a 'bluesky' scenario if it meets margin targets and buys back shares in the period to 2021, according to a report from Davy Stockbrokers.
It also added that a spin-off of the group's US business "makes little strategic or financial sense and remains unlikely".
Shares in CRH, Ireland's biggest company, were trading at around €31.75 yesterday, giving it a market capitalisation of €26.6bn. If it was to hit €46 a share, based on the current issued share capital, its market capitalisation would soar to more than €37bn.
CRH said last month that it's establishing a building products business that will combine its European lightside and distribution units with its American products division. It's aiming to create value through greater integration and synergies.
The company is also engaging in a strategic review of its European distribution business, aiming to boost margins and returns. CRH said it will also explore other strategic options for the unit.
CRH is also targeting €7bn of excess financial capacity after capital expenditure, a €1bn share buyback and ordinary dividends, in the period to 2021.
"This cash thus provides significant potential for either value-driven M&A or further returns to shareholders," noted Davy Stockbrokers.
The broker added that cost savings will be the key element for CRH in achieving its 2021 goals.
"Little detail has been provided on where these savings will come, but the group has highlighted areas such as process efficiencies, procurement and leaner structures as likely to deliver improvement," it noted, estimating that CRH will generate between €450m and €500m of cost savings by 2021.
"We suspect that cost savings will lean heavily on lowering the cost of sales through improved processes and leveraging the group's greater scale. Increasingly, modern approaches to procurement (e-sourcing) and process efficiencies are likely to be front and centre in cost saving efforts," said Davy in its report.
In April, CRH announced that it would buy back €1bn of its own shares over the next 12 months, with chief executive Albert Manifold (pictured) citing the group's "strong balance sheet and cash flow generation" for the decision to return cash to shareholders.
CRH is also targeting a further €1.5bn to €2bn in disposals in the medium term as it continues to recycle assets that do not meet its investment criteria.