The Business case for CRH
CRH is a global diversified building materials group with around 3,900 locations worldwide. CRH plc was formed through a merger in 1970 of two leading Irish public companies, Cement Limited (established in 1936) and Roadstone, Limited (1949). The group product profile is segmented into:
Heavyside materials which manufactures cement, aggregates, ready mixed and precast concrete, concrete landscaping and asphalt products. Lightside, which produces construction accessories, shutters and awnings, fencing and composite access chambers. Building materials distribution is a channel for distribution of building materials to the professional contractor, for sanitary, heating and plumbing products and DIY business which provides decorative and home improvement products to the consumer.
CRH PLC's Business model
CRH PLC operates strong vertically-integrated heavyside materials businesses which have strategically located long-term reserves. CRH plc manufactures and distributes a range of products servicing the construction needs, from the fundamentals of heavy materials and elements to construct the frame, through exterior products that complete the building envelope, to distribution channels, which service construction fit-out and renewal.
5 Reasons why should you buy this company
1. Scale of operations - CRH is one of the world’s leading building materials companies, with a business that today spans 31 countries and which serves all segments of construction industry demand.
CRH supplies raw materials and finished products for residential, non-residential and infrastructure construction applications. It also has distribution businesses that supply products to the professional building contractor and to the home-owner.
CRH is the largest building materials company in North America, a regional leader in Europe and has a growing presence in the Asian economies of India, China and the Philippines. The company sectoral exposure is split into Residential, non-residential and infrastructure almost evenly and these are the sectors that European and American government have committed funding for growth in the next decade.
2. Strong profit delivery – in spite of construction markets being subdued for long period of time, the company has managed to grow sales by 35%, EBITDA margin increase of 8.8% and dividend growth of 1.6% on a year on year basis.
EBITDA is set to increase by 20% at group level while on a segmental basis it is expected to be up 5% in Europe, up 39% in the Americas and up 7% in Asia. Operating cash outflow of €0.3 billion has been better than normal seasonal patterns.
These trading results for the first half of 2016 reflect continued positive momentum in the Americas combined with a more moderate experience in Europe and the inclusion of results from the two major acquisitions completed in the second half of 2015.
3. Restructuring and excellent market position
- since the previous recession of 2008/2009, the company has gone through a major restructuring which has taken out 2.5 billion pounds of cost out of the business between 2009 and 2013. This resulted in a leaner business with improved efficiencies, improved profit margins going forward and a more balanced portfolio mix.
4. Infrastructure spend due to rise over the next decade - US construction markets outpacing overall economic growth, residential and non-residential markets continue to advance, infrastructure funding underpin is a real benefit till to come.
Demand environment is supporting pricing momentum on the back of positive economic momentum due to 3.5% infrastructure spending growth year on year in the US. Pricing coming back in the US, over the next decade will be supported by 10 trillion dollar government funding commitment.
This is an astonishing amount which is roughly the size of Chinese economy, second largest economy in the world. In addition CRH is in the top 10 largest construction operators in the US.
5. Integration of emerging market businesses - Phillipines has solid fundamentals with a positive demand environment which drives volumes and prices and helps increase free cash flows.
This market consist of 100 million people, with CRH owns a 20 million ton cement business making it the second largest operator in that market.
Business is strong driven by growing residential property
. India construction volumes are tracking ahead of expectations on increasing demand, this long term play which will become a solid earnings underpin in the medium to longer term future of the company.
Watch the construction trend turn as the Trump presidency kicks off
I believe the Trump presidency is a catalyst for a turn in the construction trends which have been subdued for a protracted period of time.
CRH has a strong pricing momentum behind it and I still back the stock to make new highs in the next 12 months due to all the work they put in during the tough period following the recession which include restructuring the portfolio mix, reducing debt and bedded acquisition.