Saturday 17 March 2018

Dan White: Shareholders will be hoping new CRH boss can deliver dividends

Incoming CEO will be tasked with restoring Ireland's largest industrial firm

Insider: Albert Manifold steps up from deputy role
Insider: Albert Manifold steps up from deputy role
Dan White

Dan White

ALBERT Manifold faces many challenges when he takes over from Myles Lee as CRH boss at the beginning of next year. Investors will be hoping that he forsakes Mr Lee's safety-first approach and reinvigorates Ireland's largest industrial company.

When it came to appointing a replacement for Mr Lee, who first announced his decision to retire last February, CRH stuck with its tried and tested formula of appointing its top man, and it's always been a man, from within.

Ever since CRH was formed in 1971 it has always given its top job to an insider.

This time was no different. Mr Manifold, who first joined CRH in 1998 has been the group's chief operating officer, effectively Mr Lee's deputy, since the beginning of 2009. The king is dead, long live the king.

CRH would argue, with more than a little justification, that its policy of appointing insiders to its most serious positions has delivered big time for shareholders. Over the past 42 years, CRH has grown from being a small, predominantly Irish-based, cement and aggregates producer, to become one of the world's largest building materials company with 2012 sales of €18.6bn and operating (pre-interest) profits of €845m.

Why change a winning formula? The past five years have been very tough for CRH and the other leading building materials groups. Instead of following the example of previous depressions and stimulating their economies by building new roads, bridges, airports and schools, virtually all of the western developed economies have hunkered down and tried to reduce their budget deficits.

Only China, and more recently Japan, have followed the classic Keynesian policy of boosting infrastructural spending to pull their economies out of the slump.

Such fiscal rectitude is bad news for CRH. Its sales peaked at just under €21bn in 2007 before falling by 18 per cent to €17.2bn by 2010. While CRH's annual sales recovered to €18.6bn by 2012, they are still down by almost 12 per cent on their peak levels.

This decline in sales has had a disproportionate impact on CRH's profits.

This is because it is a capital-intensive business with high fixed costs.

This means that when its sales fall it is unable to cut its fixed costs as quickly. This has had a devastating impact on the CRH bottom line, with operating profits falling by two-thirds from their 2007 peak of almost €2.1bn to just €698m in 2010. CRH's 2012 operating profits of €845m were barely 40 per cent of the 2007 peak.

While CRH can hardly be blamed for the global economic downturn and the mistaken policies most governments have pursued in their attempts to deal with it, the company's own response has also been questionable.

Mr Lee was barely a wet day in the job when, in March 2009, he sprung a massive two-for-seven rights issue, which raised the company almost €1.3bn.

At the time of the rights issue, the company led the markets to believe that it would use the rights issue cash to take advantage of the global economic downturn to pick up cheap assets.

However, instead of using the rights issue proceeds to ramp up its acquisition spend, CRH stuck with its existing policy of small bolt-on acquisitions.

Earlier this month, CRH announced that it had spent €470m on acquisitions and investment in the first half of 2013. While this was up significantly on the €250m which the company spent in the first half of 2012, it hardly represents the kind of blockbuster deals which shareholders were led to expect in March 2009.

Even worse, the rights issue seriously diluted existing shareholders, who saw their proportionate holdings shrink by over 22 per cent if they didn't exercise their right to purchase the new shares. As a result, CRH's earnings (basically after-tax profits) per share have shrunk from 260 cent in 2007 to just 76 cent in 2012, a decline of more than 70 per cent.

Even allowing for the difficult external environment in which CRH has been operating for the past six years, such a dismal performance simply isn't good enough.

With its year-end net debt having fallen below €3bn it's difficult to resist the conclusion that CRH has, consciously or otherwise, opted to remain within its comfort zone in recent years.

The challenge facing Mr Manifold will be to get CRH to raise its game. His accession to the chief executive's job next January means that CRH will have replaced both of its most senior figures (Nicky Hartery took over as chairman in May 2012) in the space of just 20 months. Will this infusion of fresh(ish) blood lead to a reinvigorated CRH?

Mr Manifold, who is aged just 50, can look forward to almost a decade at the top of CRH. During that period he must find ways of restoring the group's mojo. CRH shareholders, who have lost over half of the value of their investment since 2007, will be hoping that he succeeds.

Irish Independent

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