Sunday 22 September 2019

Redburn report places brighter spotlight on CRH's valuation

Albert Manifold, Chief Executive of CRH, which updates this week. Photo: Gary O'Neill
Albert Manifold, Chief Executive of CRH, which updates this week. Photo: Gary O'Neill
Samantha McCaughren

Samantha McCaughren

Ireland's building materials giant CRH will report interims on Thursday and there is some positive mood music in the background. Its peers in the US agree that public construction spending is strong and may get stronger. With CRH's Americas Materials division heading for 50pc of group earnings before interest, tax, depreciation and amortisation (ebitda) by 2020, that can only be good news.

However, a new report from British research and equities firm Redburn, in which Rothschild acquired a stake last month, makes for some interesting reading - and raises questions about the future of CRH's European and Asian assets. It is particularly of interest given that activist shareholder Cevian continues to apply pressure for structural change at the company.

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The positive sentiment around construction in the US has helped buoy CRH's share price. Since January, the stock is up 24pc in euro terms, 30pc in sterling.

However, US peers have exceeded this performance, with Vulcan up 43pc, Martin up 46pc and Summit up 54pc. Martin and Summit are close to all-time highs.

Redburn has delved into the various divisions in CRH and tried to understand which multiples are apparently being applied to which parts. It believes the Americas Materials business is the most straightforward to assess - the multiple achieved by its peers in the US can be applied to the known proportion of ebitda delivered by that division.

Stripping this chunk of the business out, Redburn believes that the 'implied' market multiple for CRH's Americas Products and European and Asian business has moved from around eight times ebitda in late 2015 to just two times ebitda in August 2019, which it describes as a "severe re-rating".

Redburn digs a little deeper by trying to apply a peer multiple for Americas Products. The analysis is hampered somewhat by the shortage of listed peers for Americas products, but it does settle on comparing it with some other companies in the wider construction sector, eventually stripping out its estimates for the European and Asia assets.

It doesn't make for pleasant reading. It says that, "incredibly", the rump valuation for those assets has moved into negative territory, at -1.3 times enterprise value/ebitda.

"If the European and Asian assets were small, this would matter little," says Redburn. "But they are forecast to deliver €1.15bn of ebitda, and €1.25bn in 2020.

"Moreover, if the 'rump' was always so poorly valued, implicitly we might care less."

However, back in mid-2015, the same analysis suggested the market was paying around eight times ebitda for these non- Americas assets.

CRH would no doubt strongly contest some of the conclusions in this report and other broker analysis, including a new report from UBS, put a very strong multiple on the non-Americas business.

Indeed, Redburn admits that its sum-of-its-parts valuation approach could be open to criticism. One market source told me the methodology was 'questionable' and asked how any analysis could place a negative valuation on businesses that generates ebitda of €1bn.

Redburn isn't all negative on CRH though, and accepts that the backdrop in Europe has weakened since 2015, due to the likes of Brexit and a loss of economic momentum. It commends the company for its ongoing share buyback, as well as the increased pace of its disposals.

It described the exit price of €1.64bn for its European distribution business as "very impressive". "The lack of credit given by the share price to this value creation has been surprising," it said. But the wider questions it raises about the valuation of the European and Asian assets remain.

And they feed nicely into the approach being taken by activist Cevian, which owns 3pc of CRH and said recently that the company had "become too complex, both structurally and operationally". It wants more change.

Like the Redburn analysts, Cevian has acknowledged that CRH has made progress to date. Arguably, Cevian's presence on the shareholder register has helped ensure that buybacks and divestments have been front of mind for CRH boss Albert Manifold. He would almost certainly argue that those measures would all have happened anyway.

What is clear is that Cevian will not be sated with the steps which have been announced to date, and may well be seeking to unlock value in the company's European and Asian assets. And sooner rather than later.

Cevian positions itself as a constructive and patient activist, rather than one looking for a quick fight. However, its patience should not be mistaken for a lack of grit. Cevian isn't going anywhere.

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