CRH PLC – Demonstrated significant improvement in EBITDA and margins.

CRH PLC (LON: CRH) is a FTSE 100 listed Company, which provides building materials and operates through nearly 3,100 location in 30 countries.

On 4 March 2021, the Company expects to report its preliminary results for FY20.

Investment Rationale – Hold at GBX 3,258.00

• FY20 EBITDA is expected to be over US$4.4 billion, which is ahead of FY19 level on a like-for-like basis.
• Since H1 FY16, gross margin and EBITDA margin have remained above 31.0% and 9.5%, respectively, which reflects decent fundamentals.
• From a technical indicator, 20-day SMA (3,197.50) is supporting the upside potential.
• In FY20, net debt is expected to report a significant improvement against FY19.

Risk Assessments

• The Covid-19 pandemic is one the emerging risk which has been directly impacting the business.
• Moreover, it can reduce mortgage affordability and housing demand.
• The disruption to the supply chain can increase material costs.
• The performance is also subject to the change in government policy and planning regulations as it can affect the value of land purchasing.

Recent News

3 December 2020: CRH announced that Mr. Richard Fearon and Mr. Lamar McKay were appointed as non-executive Directors, with effect from 3 December 2020.

Trading Update – November 2020 (as on 24 November 2020)

(Source: Company Website)

• CRH reported a robust performance in a challenging trading environment.
• Despite lower sales, there was an improvement in EBITDA and margin.
• The Company expects FY20 net debt/EBITDA of around 1.4x as it continued strong cash generation.
• It has also reached an agreement to divest its Brazil cement business for US$0.2 billion.

One Year Share Price Chart

 (Source: Refinitiv, Chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Q3 FY20 trading in building product division was benefitted from improved demand in North America. CRH expects FY20 EBITDA to be above US$4.4 billion, which reflects significant financial strength and longer-term prospects. Although the market continued to be impacted by the pandemic and the Company witnessed lower activity level, CRH is pleased with improved profitability and margins. Overall, the Company is well-positioned to navigate this challenging time and emerge stronger in the times ahead to pursue growth opportunities. Stock 52 week High and Low were GBX 3,560.00 and GBX 1,500.00, respectively.

Based on the valuation methodology, business capabilities and improved margins, we have given a “Hold” recommendation on CRH PLC at the current market price of GBX 3,258.00 (as on 14 January 2021, before the market close at 9.05 AM GMT), while we look forward to reviewing the upcoming catalysts.

Persimmon PLC – Delivering robust performance despite market uncertainties.

Persimmon PLC (LON: PSN) is a FTSE 100 listed Company, which is involved in housebuilding business across England, Scotland, and Wales. It trades under the brand name of Persimmon Homes, Charles Church, Westbury Partnerships, and FibreNest.

On 3 March 2021, PSN expects to report its FY20 results.

Investment Rationale – Hold at GBX 2,632.00

• The longer-term fundamentals of the UK housing market appear to be resilient, while Persimmon shall be able to pursue the upcoming market opportunities.
• The average selling price improved in FY20, while the forward order book reported a 25% jump year-on-year.
• From a technical standpoint, 14-day RSI (37.54) is currently supporting the upside potential.
• In H1 FY20, PSN’s EBITDA margin (at 25.2%) and Net Income margin (20.0%) are higher while debt/equity is lesser than the industry median, reflecting that the Company is less leveraged and yet, generating better profit margins.

Risk Assessments

• The shutdown of sites, sales offices, and off-site manufacturing facilities due to Covid-19 restrictions can lead to a significant decline in earnings and cash flows Half-Year Results (for the half-year ended 31 May 2020).
• The changing patterns of consumer demand pose a risk to future developments as well.
• The recessionary economic conditions can impact consumer confidence and demand in the short-term.

Recent News:

17 December 2020: Andrew Wyllie was appointed as an Independent Non-Executive Director with effect from 4 January 2021.

Trading Statement ahead of its Final Results for the year ended 31 December 2020 (as on 13 January 2021)

 (Source: Company Website)

• PSN produced a solid performance in FY20 against the backdrop of the unprecedented challenges, as it continued to deliver the new homes the country needs.
• The Company generated £3.33 billion in total revenue, while the new housing revenues were £3.13 billion (FY19: £3.42 billion).
• In FY20, the average selling price improved by 3.7% year-on-year.
• Also, the Group forward sales at the end of FY20 were 25% ahead of FY19 level.
• As of FY20, liquidity remained strong with cash balance of £1,234 million post returning £351 million to shareholders.

One Year Share Price Chart

 (Source: Refinitiv, Chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

PSN has a solid track record of managing the housing cycle with disciplined capital investments. The strong forward order book underpins the growth prospects. However, the rising unemployment amid Covid-19 uncertainties can pose the medium-term demand at risk. Notwithstanding, market fundamentals for the housing sector looks strong in the longer-term. Overall, PSN is well-positioned to withstand potential future challenges and deliver sustainable long-term returns to shareholders.  Stock 52 week High and Low were GBX 3,328.00 and GBX 1,367.50, respectively.

Based on the factors discussed above and strong forward order book supported by valuation conducted above, we have given a “Hold” recommendation on Persimmon PLC at the current market price of GBX 2,632.00 (as on 14 January 2021, before the market close at 8.30 AM GMT), while we look forward to reviewing the upcoming catalysts.

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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