CRH is an Ireland-based leading global diversified building materials group, headquartered in Dublin, Ireland. It is the second largest building materials company worldwide and largest in North America, the largest heavyside player in Europe as well as strategic operations in Asia and South America. The group was formed in 1970 through a merger of two leading Irish public companies, Roadstone, Limited (1949) and Cement Limited (established in 1936) and has today expanded to serve all segments of construction industry demand. The business spans across 32 countries and, along with subsidiaries, has operations at around 3,700 locations around the world, employing over 90,000 people.

The company's operations focus on three closely related core businesses: primary materials, value-added building products and building materials distribution, and engages in manufacturing and distributing a diverse range of superior building materials and products for the built environment, with materials and products being used extensively in construction projects of all sizes, across the world. The company provides building materials across the spectrum of the construction industry, including raw materials and finished products for residential, non-residential and infrastructure construction applications. Along with production, it has a distribution business that supplies products to a range of users. It is a Fortune 500 company, and is listed on the London Stock Exchange, with shares being a constituent member of the FTSE 100 index, the ISEQ 20 and the EURO STOXX 50 index, and has ADRs listed on the New York Stock Exchange.

Key Statistics

 

Management
Nicky Hartery is the Chairman of the Board; he was appointed to the Board in June 2004. Albert Manifold was named CRH Group's Chief Executive on January 2014 and has held operational responsibility for businesses in Europe and the US. Senan Murphy is the Group Finance Director; he was appointed to the Board in January 2016.

Segments
The company's operations are now differentiated in three operating segments, from six in prior years, reflecting more simplified organisational structure:  Europe Materials, Americas Materials, and Building Products. Asia was combined with Europe Heavyside to form Europe Materials; the Americas Materials Division is organised across three countries - the US, Canada and Brazil - and employs approximately 27,300 people at over 1,450 locations; Americas Products Division, Europe Lightside Division, along with Europe Distribution Division merged into one new global Building Products Division.

Top Shareholders
 
(Source: Thomson Reuters)

Key Financial Metrics (FY 2018, in €m)

(Source: Company Filings)

Key Financial Highlights (FY 2018)
The company posted strong results in FY 2018 as the overall trading environment for the group in 2018 was positive: despite energy-related input cost inflation and significant weather disruption throughout the year, the company was assisted by positive underlying momentum in Europe and good demand and continued favourable market fundamentals in the Americas. The sales for the period was €26,790 million, reporting an increase of 6% more than in 2017 and 3% ahead on a like-for-like basis, reflecting the strong performance of each of the individual segments. Americas operations benefited from a positive macroeconomic backdrop and good underlying demand in the US, and despite harsh winter weather conditions experienced in the early months and record levels of rainfall during the year, organic sales increased by 4% in Americas Materials Division, while overall sales improved by 2% compared to 2017, supported by continued growth across all sectors in markets. Driven by strong performance of Europe Heavyside and Europe Lightside, boosted by acquisitions, in Europe, total sales were up 4% compared with 2017 and organic sales were 2% ahead. Driven by acquisitions and underlying growth, EBITDA for the year increased by 7% to €3.4 billion. This reflected in EBITDA margin as well which rose by 10bps. Though operating profit from continuing operations rose by 4% to €2.1 billion, profit after tax from continuing operations decreased to €1.4 billion. However, augmented by the gain on disposal of Americas Distribution business, group's profit for the financial year was €0.6 billion ahead of 2017 at €2.5 billion (2017: €1.9 billion), reflecting an increase of 31%. Basic earnings per share reported a rise of 33% over the year to €302.4 cent, from €226.8 cent in 2017. Basic/adjusted earnings per share from continuing operations, which excludes the one-off impact of changes in corporate tax rates in the United States and a Swiss pension plan past service credit) rose by 11% to €172.0 cent, reflecting the strong bottom-line numbers reported in the financial year 2018. In addition to an interim dividend of €19.6 cent per share paid, the board is proposing a final dividend of €52.4 cent per share. This took the total dividend to €72 cent for the year, reflecting an increase of 6% over the last year. This represents a dividend cover of 2.4 times. Operating cash flow in decreased in 2018 to €1.9 billion, while net debt of €7.0 billion at 31 December 2018 was €1.2 billion higher than year-end 2017.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The company's profitability margins have remained stable over the periods. However, the margins are less than the industry median, indicating a room for improvement through better cost-cutting. The quick ratio decreased in 2018 and is moving towards the industry median now, while the current ratio is in line with the industry. The company's leverage increased slightly in 2018 and is a bit more than its peers. The turnover ratios are significantly more than the industry median, reflecting the optimal utilisation of resources.

Valuation Methodology
Method 1: EV/Sales Multiple Approach (NTM)


To compare CRH with its peers, EV/Sales multiple has been used. The peers are Ferguson PLC(NTM EV/Sales was 0.74), Barratt Developments PLC(NTM EV/Sales was 1.02),HeidelbergCement AG(NTM EV/Sales was 1.17) and Taylor Wimpey PLC(NTM EV/Sales was 1.24). The mean of EV/Sales (NTM) of the company’s peers was 1.08x (approx.).

Method 2:EV/EBITDAMultiple Approach (NTM)
 
*All forecasted figures and Peers information have been taken from Thomson Reuters.

Share Price Commentary
 
Daily Chart as at April-01-19, before the market close (Source: Thomson Reuters)
 
On April 01, 2019, at the time of writing (before the market close, at 11:45 am GMT), CRH shares were trading at GBX 2,399, up by 1.01 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 2,891/GBX 1,960.56. At the time of writing, the share was trading 17.01 per cent lower than its 52w High and 22.36 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,742,306.00; 30 days – 1,882,010.37 and 90 days – 1,696,111.94. The average traded volume for 5 days was down by 7.42 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 13.1x as compared to the industry median of 13x. The company’s stock beta was 1.16, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £19.20 billion and a dividend yield of 2.59 per cent.

Risks Assessment and Growth Prospects  
The construction industry is structurally cyclical as it is influenced by a myriad of geopolitical and economic circumstances, ranging from consumer sentiment and weather conditions to governments' ability to fund infrastructure projects. Unfavourable fluctuations in fuel and raw material prices can also negatively impact the financials of the company. The uncertainties from Brexit pose significant challenges for the company as the company might have to face a fall in construction activity in the UK, challenges in labour resources accessing the UK, movement of goods and services and repatriating earnings, currency devaluations; this could result in adverse financial performance and a fall in the Group's net worth. Commodities, which are part of the company's portfolio of products, face strong volume and price competition and face the risk from substitute products. The group uses financial instruments to raise capital and run business, leading to interest rate and leverage, liquidity and credit rating risk. Moreover, any tightening of monetary policy by the central banks might increase the borrowing cost for the company. The company expects the US economy, supported by continued favourable market dynamics, to continue to grow in 2019 at a similar pace, leading to similar gains in US housing construction and non-residential construction. Moreover, the government's funding for infrastructure is anticipated to rise. Canada is expected to perform better in 2019. Key markets in Europe are expected to be strong with continued progress, though with regional variations. In the emerging markets of Asia, the benefit of continued economic growth is likely to translate into better demand for constructions products. The company is in an excellent position to build upon the gains made in 2018 and further improve the margins and generate more cash and returns for the shareholders. The company has diversified operations which helps it to cushion the impact of cyclical demand and helps in achieving a balance in its geographic presence and portfolio of products.
 
Conclusion
The construction market continues to remain strong, despite certain economic hiccups. The market is assisted by a decent job scenario. Even in turbulent markets like Britain, policies like “Help to Buy” has contributed towards the growth of the sector. The company is in a great position to take advantage of the strong market. Based on strong prospects supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 2,375 (as on 29th March 2019) with high single-digit upside potential based on 8.4x NTM EV/EBITDA Value (approx.) on FY19E EBITDA and 1.08x NTM EV/Sales (approx.) on FY19E Sales.
 
*The buy recommendation is valid for the current price as covered in the report (as on April-01-19).