Building a case for investing in the construction sector and its suppliers in the current environment is never going to be easy. Chronic uncertainty about Brexit has meant building and development projects have been put on hold (witness Crest Nicholson, which only this week shelved a £400 million planned scheme in Hove).
Rising labour costs and inflation can put the squeeze on suppliers, particularly if they meet resistence when they try to pass price rises on to customers. Treacherous weather conditions can halt work and seize up a supply chain.
And then there’s the C word, as the shadow of Carillion continues to loom over the sector.
Into this maelstrom comes CRH, the Irish building materials group that among other things owns Tarmac. The company was created in 1970 through the merger of two Irish businesses that produced cement, concrete and asphalt. A member of the FTSE 100 with a valuation of just over £18 billion, CRH produces a wide range of building materials for use in bridges, roads and commercial buildings. It employs more than 85,000 people in 32 countries and in its most recent financial year made pre-tax profits of just under €1.9 billion on revenues of €25.2 billion.
CRH’s structural breakdown is straightforward. Its European businesses supply “heavy” building materials such as lime, aggregates, cement and concrete and “light” products including shutters and awnings and architectural accessories. As well as working for governments and private contractors, it sells materials to builders, heating engineers and plumbers and also operates as a DIY retailer. It has a similar heavy materials and lighter products division in the US, its largest arm, and a cement business in Asia, in the Philippines, northeast China and southern India.
That spread of earnings helps to insulate CRH but there are plenty of factors it can’t control. The weather, for example, has been problematic, with last year’s Beast from the East and heavy rainfall in the US holding back what might otherwise have been more promising earnings.
While a 3 per cent increase in revenues and a 2 per cent uplift in underlying profits before tax and other items for the first nine months is creditable, the City expects a lot of this group and projected annual profits of about €3.35 billion are a shade below analyst expectations.
Like its competitors, CRH has had to deal with rising costs in virtually all of its markets. The balance is a fine one, but the company seems confident it can pass on the effects to its customer. It has so far held its group margins at 9.5 per cent.
Brexit has already prompted a slowdown in construction in the UK. In the US the market is considerably more attractive, consistently outpacing GDP. Nevertheless, with America’s economy showing signs of slowing, it is questionable whether that can continue in the next decade.
Against this horrid backdrop, CRH seems efficient. While North America accounts for about 60 per cent of the group, its exposure to the UK is just 10 per cent. It has promised to improve margins by three percentage points by 2021 and has identified cost savings of about €100 million. With net debt at just over twice profit before tax and other charges, neither is it overly leveraged.
CRH’s shares have not had an easy time. Despite a €1 billion buyback programme that should be providing support, its stock has lost just under 16 per cent over the past 12 months. The shares, up 0.7 per cent, or 17p, at £22.15 yesterday, are by no means expensive, trading at 11.7 times earnings for a yield of 2.7 per cent. There is an investment case for the company, but not for the sector.
ADVICE Avoid
WHY The company is impressive, but there are too many factors moving against its markets
NCC
It wasn’t a profit warning, but some of NCC’s longer-standing investors feared it might lead to one.
The Manchester-based cybersecurity consultancy made veiled references to some internal hiccups at its half-year results last week and shareholders were reminded of two quick-fire earnings alerts two years ago that were very real and they took fright.
The shares, down just under 30 per cent on the day and up a relatively modest 6½p to 125p yesterday, have yet to recover, despite the endeavours of supportive analysts and the house broker to calm nerves. Investors are still worried.
NCC was created in 1999 from a management buyout at the then state-owned National Computing Centre and listed in 2004 at 29p a share. It employs more than 2,000 staff across 35 offices and in its most recent financial year made revenues of £244.5 million but a loss before tax of £55.3 million.
Its two divisions have their separate struggles. The Escrow arm, which accounts for 15 per cent of revenues, backs up and stores companies’ essential software, to be drawn on and maintained if the initial provider goes under. This unit is high margin but is increasingly defunct as businesses start to keep even their vital stuff in the cloud. Revenues and profits fell in the first half.
The far larger Assurance division offers consultancy services, tests the resilience of corporate cybersecurity and has an emergency response team. While first-half revenues in the US raced ahead, demand for its more basic services in the UK slowed.
The problem for NCC is there are too many clues suggesting that it has yet to work through the legacy of an ill-executed acquisitions spree by its former chief executive, replaced just over a year ago by Adam Palser.
Botched manual invoicing, multiple IT systems, expenses and credit control systems that have yet to be properly implemented outside of the UK; these are just some of the things that mean it’s obvious there is lots to do.
The shares trade at about 14 times forecast earnings for a yield of more than 3.5 per cent. The worry is there may be one or two nasties to come before this is fully fixed.
ADVICE Avoid
WHY Scale of the recovery programme makes it too unpredictable
