CRH plc is the largest building materials company in North America. The company happens to be domiciled and headquartered in Ireland, where the company was originally founded.  The stock trades in the Dublin and London stock markets, with also an ADR listing on the NYSE. Last week, CRH shareholders approved to move the primary listing to the NYSE (effective Sep 25^th), de-listing its shares from Dublin and moving to a standard listing in London. We believe this move will raise CRH’s profile with US investors (where an ADR does currently exist), providing them with a quality, liquid and cheaper alternative to market darlings VMC and MLM, and resulting in a re-rating of CRH’s trading multiple. This is a situation comparable to what FERG recently went through, which has been written up on VIC several times. Yes, de-listing in Ireland might result in near-term pressure due to index selling (more on this below), but we believe this would present an even better entry point ahead of the coming re-rating and eventual inclusion in US market indices.

Description and history

CRH was formed through the 1970 merger of two Irish companies, Cement Limited and Roadstone Limited. Over the years, the company started to look beyond its small domestic market and engaged in M&A overseas. Over the past two decades, the company has consistently focused on growing its North America business organically and inorganically, while divesting lower-margin businesses and non-core geographies in Asia and Brazil. North America currently represents about 75% of CRH’s EBITDA.

The company reports results across 3 segments: Americas Materials, Europe Materials, and Building Products.

·         Americas Materials: CRH is the 3^rd largest aggregates producer (220mm+ tons/yr) and cement manufacturer in the United States (producing 14mm tons/yr at 12 cement plants). The company also operates a network of 370 concrete locations.

·         Europe Materials: The company operates cement and aggregate operations, with the UK accounting for 38% of segment sales and France, Poland, Ireland, Germany each at near 10%.

·         Building products:  comprises an array of downstream building products, ranging from fencing to decking solutions to pre-cast concrete shapes.

By end-market, CRH is roughly 40% exposed to infrastructure markets, while residential and non-resi are each around 30%.

We find CRH to be a well-managed company. CEO Albert Manifold has been in charge for the past 9 years, delivering a consistent, sensible strategy focused on growing North America and improving margins. M&A has been a key piece of this, including sizeable acquisitions such as Ash Grove cement ($3.5bn in 201&) or Barrette fencing and railing ($1.9bn in 2022) , but also divestitures such as Building Envelope, sold for $3.8bn in 2022, or European Distribution, sold for $1.9bn in 2019. We find CRH to be a disciplined acquirer and seller. For the most part, the company tends to pay reasonable prices in its deals, generally not surpassing 10x EBITDA multiples. While the company would love to add aggregates assets in the US, it generally does not engage in bidding wars with the VMCs and MLMs for these businesses that transact closer to mid/hi-teen EBITDA multiples.

CRH has been on a steady margin improvement path, doubling its EBITA margins from 8.6% in 2014 to 17.3% in 2022. This has been accomplished both organically through improving operations but also through the portfolio re-shaping mentioned earlier. 

Valuation

We believe moving CRH’s main listing to the NYSE will unlock value and result in a re-rating:

·         While CRH trades at the top-end of European peer valuations (7.1x 2023 EBITDA) compares to HOLN.SW at 6.5x, HEI.GR at 5.3x, BZU.IM at 4.8, US peers trade at much higher valuations, ranging from EXP and SUM at 9-10x to MLM and VMC at 16-17x.

·         CRH should get full credit for its 75% of earnings exposure to North America, a more attractive market than Western Europe. In addition, US investors don’t seem to have the ESG qualms about carbon emissions from cement production that European investors have. We believe much of this explains the de-rating in European cement multiples in the past 5 years while US building materials names saw their multiples expand.

·         So, what is the right multiple to apply for CRH post-NYSE listing? The 16-17x EBITDA that MLM VMC earn are out of reach: those 2 companies are mostly aggregates producers (>75% of EBITDA) with phenomenal pricing and EBITDA margins in the mid/high 20%s. We think SUM (10.1x) and EXP (9.3x) are directionally much better comps. At a target 9x multiple on 2024 estimated EBITDA of $6.1bn, we peg CRH’s fair value at $68/ADR, or 35-40% upside from current levels.

Delisting/Relisting

The flow dynamics around the delisting in Europe and re-listing in the NYSE are worth discussing: CRH belongs in many European indices including the Euro Stoxx 50, the Euro Stoxx 600, FTSE 100, MSCI Europe, etc. Before CRH becomes eligible to join any US-based indices, it will have to be pulled out of most of these European indices, resulting in forced selling by index-tracking ETFs.

The timeline for the above is the following: the last day of trading in the Dublin line should be 20^th Sept, and on Sept 25^th, the London listing will switch from “premium listing” to “standard listing”. We are not index experts ourselves, but people we consult with estimate that associated index selling should amount to $3-4bn of supply (18-24 days of average volume when you add up the ID, LN and ADR lines). This is obviously material and worth bearing in mind as you think about your entry point. At the same time, index players operate by anticipating these moves, so it’s fair to expect most of the negative impact on the stock price should be discounted by September. Given that the move in primary listing was approved at the EGM only last week, if one were to get cute about timing the entry here, it probably makes sense to wait a month or two, or to stage the building of a position.

Further out, we have of course the major positive of eventual inclusion into US indices. At a current market of $37bn with essentially the entire company floated on the market, CRH will be an obvious candidate to join major indices like the S&P 500, Russell 1000, or the S&P Total Market Index. Sell-side estimates speak of >40 days of demand if/when SPX inclusion comes, and >10 for each of the other 2 mentioned.  While this should constitute an eventual upside catalyst, we think these index inclusions are likely mid-2024 and beyond events, as they first require the publication of US filings like the 10-Q, 10-K etc.

To summarize, if one can look through the near-term price action, the upside we see in CRH is very compelling on a 12-month horizon. However, the adverse near-term index flows suggest it might be worth taking it slow in the next couple of months to build your position.