2013 ? The Great Irish Share Valuation Project (Part XI)
Prior Post: Here (valuation, no commentary)
Price: EUR 16.215
Early last year, I put a EUR 12 odd price target on CRH ? about 20% below the share price at the time. For the rest of the year, CRH?s business was left treading water (vs. steady progress in 2011), and the stock looked like it would hit my target on a number of occasions. However, 2013 has ushered in a powerful rally ? CRH is now 7% higher than last year, leaving my target price dead wrong?
In the Americas, CRH enjoyed 15% & 12% increase in revenues & (adj) EBITDA, respectively. However, this was pretty much wiped out by a 7% & 12% decline in revenues & (adj) EBITDA in Europe, leaving total company results mostly unchanged. Portfolio management was left treading water also, with divestment proceeds actually exceeding the cost of their bolt-on acquisitions. Myles Lee, the CEO, is now planning to cap off a difficult few years by retiring at the end of 2013 ? a successor is still to be announced.
The underlying (adj) operating profit margin has increased somewhat, to about 5.2%. This is still well shy of CRH?s long-term average of 9.9% ? and considering how Europe continues to lag the US, we?re obviously some distance away from reaching/exceeding that kind of margin again. On the other hand, CRH is clearly the bluest of blue chips listed on the ISE ? in fact, it?s the largest stock listed on the exchange (well, ignoring Allied Irish Banks? (ALBK:ID) market cap, which is just a joke!). Despite its international exposure, CRH is probably always going to be the first stock investors & fund managers consider buying if they?re looking for some Irish exposure. Noting that & operating on the assumption margins will eventually converge, a 7.6% average of current/long-term margins might deserve a 0.7 Price/Sales multiple at this point.
Unfortunately, CRH?s EUR 4.9 bio of debt remains a worry ? with underlying interest coverage coming out at a low 3.7 times. This demands a fairly stiff negative debt adjustment to reflect a more sustainable level of debt (based on current operating profit) - I?d estimate just over EUR 2 billion is appropriate. Considering CRH?s EUR 1.8 bio of cash (which earns sod all) & its (similar) level of un-drawn loan facilities, this adjustment might seem a tad excessive. Possibly, but I?d prefer to err on the side of caution ? I think it?s far more likely they?ll be tempted to buy some growth with the cash, rather than apply it to debt pay-down. Unfortunately, there?s a whopping great EUR 0.7 bio pension deficit to factor in also.
Putting all this together, despite the debt haircut, we still have a v decent jump in my target price ? which leaves CRH looking only slightly over-valued.
Price Target: EUR 14.24
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