2016 ? The Great Irish Share Valuation Project (Part II):
Company: CRH (CRH:ID)
Last TGISVP Post: Here
Market Cap: EUR 22,579 M
Price: EUR 27.40
When Albert Manifold kicked off as CEO, it certainly looked like he was planning to right-size a rather stretched balance sheet (I even wondered whether he?d launch a rights issue). But it?s always hugely tempting for a new CEO (esp. the CEO of an Irish corporate icon like CRH), to make his mark as an empire-builder, so that resolve didn?t last long? Despite announcing a ?1.5-2.0 billion multi-year disposal programme in late-2014, 2015 proved to be the year for mega-acquisitions ? totaling almost ?8 billion, primarily the Lafarge-Holcim & C.R. Laurence Co acquisitions. [OK, Manifold did a placing in the end, but only to fund about 25% of the LH deal].
While underlying organic growth?s now progressing at a very healthy clip (primarily driven by renewed US momentum), we haven?t reached a point where it?s easy to determine an appropriate P/E multiple ? therefore, we?ll use a similar approach to my previous write-up. Noting CRH?s two big acquisitions closed in H2-2015, first we need to calculate a post-acquisition revenue run-rate: LH revenue?s ?5.1 billion & the deal closed end-July, so that?s a ?3.0 billion revenue bump for FY-2016. And CRL revenue?s $570 million & it closed end-Aug ? an additional $380 million revenue bump.
CRH?s FY-2015 EBIT margin was 5.6%, which compares to a peak 9.9% margin (back in 2007) ? so relying on the company?s actual Op FCF margin (of 8.3%) seems appropriate here for valuation purposes & deserves a 0.75 P/S multiple. [Which seems fair for the incremental acquisition revenue also ? LH & CRL earn much higher EBITDA margins than CRH, but since CRH?s Op FCF margin?s about 50% higher than its EBIT margin, it seems unwise to specifically adjust margin higher for these acquisitions]. And looking at average FY-2015 debt levels vs. year-end debt of ?9.2 billion vs. underlying net interest costs, I estimate FY-2016 net interest cost will be around ?366 million (vs. a prior ?295 million), which is just over 16% of Op FCF ? so a debt adjustment no longer seems necessary, bearing in mind CRH also has ?2.5 billion cash on hand (also provides cover for a ?0.6 billion pension deficit). [OK, props to Manifold?he?s bloody well cashing his way out of a stretched balance sheet!]:
(EUR 23.6 B Rev + 3.0 B LH + $0.4 B CRL / 1.1115 EUR/USD) * 0.75 P/S / 824 M Shares = EUR 24.53
CRH looks marginally over-valued at this point. But noting the underlying momentum of its US business, and likely cost savings to come from its two major acquisitions, we should hopefully see it grow into its current market cap over the next year. But investors should also be mindful of potential integration and/or (renewed) economic risks here, which could prove challenging for a company that?s relatively leveraged at this point.
Price Target: EUR 24.53
For related links/graphs/files, and more TGISVP analyses/price targets: Google the Wexboy investment blog.