Reporting from a recent Dublin meeting with JP Morgan analysts, they note that although CRH did not talk about current trading as such, they believe the overall tone was that there probably would not be a significant negative hit from higher costs, particularly for 2004.
Firstly, regarding US cement, CRH buys about 3.5Mt per year in the US and
cement prices have increased from US$77 at the start of 2004 to US$82 currently. Cement is a major input into ready mix concrete, which CRH sells directly and it also uses to manufacture concrete products.
Management said that the company had been successful so far in passing on the US cement price increases. CRH’s management did comment, however, that energy costs are more of a potential concern for 2005. Assuming cost inputs do not fall in 2005, higher costs would be in for a full year.
JP Morgan had been surprised by a drop in CRH EBIT margins in Ireland in the first half 2004 from 20 per cent to 17.8 per cent despite a nine per cent increase in sales, which the company had attributed to increased competition in the ready mix market.
The problem was a lull in activity in large infrastructure projects as a number finished towards the end of 2003 and into the first half of 2004. CRH’s ready mix activities benefit more from large infrastructure projects as it is able to supply the high volumes needed. If the demand mix shifts to smaller projects, then competition increases as smaller players are also able to satisfy demand. CRH expects its ready mix margins to recover as more infrastructure projects come through in 2005.
JP Morgan’s sum-of-the-parts-based valuation is €20.5. However, is adds an extra €3.7 per share, which it attributes to the potential future added value from acquisitions that JP Morgan believes CRH can create from its remaining €5.6bn of acquisition capacity that the analysts estimate it has to spend before the beginning of 2008. The main risk to the analysts overweight rating and price target is if there were a slowdown in CRH’s acquisitive growth.