Description

Investment Thesis: CRH plc

Overview:
CRH plc presents an attractive investment opportunity with a current free cash flow to firm (FCFF) yield of 6.4%, supported by a business capable of organic growth of approximately 8% per year over the long term. When considering total growth, including accretive bolt-on acquisitions, the growth rate could reach around 12%. The company’s valuation is compelling compared to global peers, with an anticipated internal rate of return (IRR) of about 20% in the public markets. This is noteworthy given CRH's relatively low sensitivity to economic and commodity cycles, reinforcing the buy thesis at the current share price.

Earnings Outlook:
CRH is set to report earnings soon. We anticipate results will either meet or exceed expectations. Any resultant weakness in the stock price should be viewed as a buying opportunity, provided the core investment thesis remains intact, which we believe is highly likely.

Recent Market Movements:
CRH has recently experienced some weakness due to:

1. Concerns from U.S. construction companies regarding adverse weather conditions in southern regions, impacting their sales volumes.
2. A significant drop related to the Yen carry trade, which lacks clear fundamental justifications.

However, the market has recognized that CRH’s exposure to high-risk, flood-prone markets like Texas is minimal, with only 5-6% of EBITDA deriving from these regions. This realization has mitigated some concerns over weather impacts. The recent price drop due to the Yen carry trade now presents an attractive entry point for investors.

Valuation:

• Enterprise Value Multiples: CRH trades at 9.4x EV/2024 EBITDA and offers a 6.4% FCFF yield, which implies a yield of over 14% plus long-term organic growth potential.

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• Sum-of-the-Parts Valuation:

  • U.S. Business: CRH’s U.S. aggregates are valued higher than peers like Martin Marietta (MLM) and Vulcan Materials (VMC), which trade at approximately 15x EV/EBITDA. With approximately 75% of EBITDA from the U.S., including significant aggregates EBITDA, CRH’s aggregates alone are valued conservatively at $40 billion. The blended value for the Americas business, considering all segments, suggests a multiple of 12.5x.
  • International Business: European cement is currently valued at a trough of 5x EV/EBITDA. Applying this conservative multiple to the 25% of EBITDA from Europe and Asia, we estimate at least a 15% upside from current levels. Further optimistic assumptions could indicate higher upside potential, with minimal downside risk given current share prices.

IRR Calculations:
A multi-year IRR calculation indicates a strong investment case. With visible EBITDA growth driven by infrastructure spending (e.g., IRA, CHIPS, IIJA) and ongoing dividends and buybacks, EBITDA is projected to reach $9.2 billion in three years. This would imply a share price of $109, assuming stable net debt and a conservative multiple. Dividends and buybacks amount to approximately $3 per share, growing at 5% annually, which equates to a 4% equity return relative to market cap. This results in an IRR of close to 20%, making CRH a highly attractive public market investment.

Catalyst

Earnings results soon should be either 1) positive catalyst for those already involved or 2) a buying opportunity on any near-term weakness. 

Various European building materials companies are focused on extracting value through relistings/spins etc. Holcim announced a spin of the America business expected to be completed in 1H2025, and there is optionality that if this goes well, CRH can float slices of their business seperately (perhaps the building materials stand-alone or pureplay aggregates biz stand alone). 

Finally, as part of the CRH re-listing, the company becomes eligible for index addition in 2H24, which will be positive catalyst. The technical selling from the EU index funds has already occured and the buying activity when CRH gets added to the S&P eventually will more than un-do the forced selling by index funds and EU-only investors.