CRH: emerging markets brickbat

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CRH sells many products and operates in 35 countries, but the Irish building materials group has a strong US earnings bias. It is the biggest producer of asphalt in the US and generated almost half of its revenue – and more than 40 per cent of its operating profit – last year in the Americas. Now, it must deal with weak construction demand and uncertainty over infrastructure spending in the US as well as an inquiry into competition in the UK aggregates sector.

Like French rival Lafarge, CRH is struggling to pass on higher energy costs to its cement and aggregates customers in the US and Europe. But in the first half, the light building products and distribution businesses compensated for margin erosion in the more basic businesses; the group margin (at the level of earnings before interest, tax, depreciation and amortisation) increased by 20 basis points to 7 per cent.

Investors have already priced in a gloomy outlook: CRH’s shares have fallen by 28 per cent from their February peak. Still, there is no need to worry about notoriously cautious CRH just yet. Its balance sheet, with net debt at 2.4 times ebitda, looks conservative. A €1.2bn mid-crisis rights issue, mostly to fund acquisitions, helped. It has done more than 400 deals with a total enterprise value of €13.6bn since 1996, UBS notes, and has €1bn of cash, possibly for more bolt-on deals.

But CRH is treading carefully: it spent €380m in the first half, €12m less than it received from disposals. It has studiously avoided the burdens of large strategic deals. But Myles Lee, chief executive, has exhibited less investment prowess in emerging than in developed markets. Last year only 15 per cent of ebitda came from China, India and Poland. Mr Lee needs to make CRH a bet on emerging market growth, not on a US recovery. It may be time to inject a little haste into CRH’s caution.

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