Davy - Upgrading to 'outperform'



Price: 1435c Rating: Outperform Issued: 23/05/12 Previous: Neutral Issued: 12/01/12
Upgrading to ‘outperform’, reflecting balance sheet and cash flow strength; limited
earnings downside NEW REPORT
Barry Dixon
CRH’s share price has fallen by almost 10% year-to-date and has underperformed the sector and its main peers. We believe it is now attractively valued, particularly given the strength of its balance sheet and cash flow. By year-end, we expect CRH to have net debt of less than ?2.7bn. This gives it one of the strongest balance sheets in a sector in which many peers still have to dispose of assets. We estimate that ?1.5bn of acquisition spend could add 10% to group earnings on a full-year basis and 50bps to group returns. CRH is the only company in the sector to have maintained its dividend through the downturn and the stock now yields close to 4.5%. European construction markets remain weak. This could result in 10% downside to our 2012 forecasts, implying a P/E of 17.3 times. However, US construction markets are continuing to improve, which could provide 5-10% upside to forecasts.
Based on our mid-cycle earnings analysis as well as the group’s potential to enhance returns by using its strong balance sheet and cash flow, we believe a price target of 1650c is achievable. We are therefore upgrading our rating to ‘outperform’ from